Bridging loans are a highly flexible form of finance, and we discuss why the ability to secure a 2nd charge on a single asset can be invaluable for borrowers
Bridging loans are one of the most flexible forms of finance available, and the huge number of applications which they may be used for has made them enormously popular within the property development sector. In addition to their popularity amongst developers, bridging loans are also commonly used by private individuals, landlords and businesses to create a flexible funding solution in situations where a mortgage is inappropriate.
Bridging loans come in a wide variety of different types, and the many lenders operating within the bridging sector provide borrowers with almost every conceivable combination of loan size, term length and payment structure. Borrowers are also able to use a wide variety of assets as collateral, and the flexibility of bridging lenders when it comes to accepting security allows many different customers to secure the right loan for them.
The use of bridging loans can often be a very powerful tool that enables businesses to expand quickly, or to seize opportunities they wouldn’t otherwise be able to. However, since bridging loans are secured against an asset they can allow the lender to repossess the borrower’s collateral if they should fail to repay. For this reason it’s vitally important that anyone considering taking out a bridging loan consults their broker before doing so, in order to fully understand the implications of this form of finance.
As already mentioned, a bridging loan is secured against the borrower’s assets. Unlike many banks, bridging lenders are able to accept many different forms of asset as a security, and there are lenders who will accept everything from bulldozers to handbags as collateral. The most common form of collateral is property, though, since bridging finance is used extremely widely within the property development sector.
One of the first things a bridging lender will do when it receives an application for finance is conduct an evaluation of the proposed assets to be used as security. This is a vital step, as the lender will need to be able to reclaim their money through the sale of the asset if the borrower should fail to repay; if the property is worth less than the value of the loan then the lender will be unable to make their money back. Once the value has been established satisfactorily most lenders will happily approve the loan, and provide funds.
In the event that the borrower is unable to repay the loan in full and on time, the lender has the option of repossessing their assets and selling them. In practise, most borrowers will try to secure alternative finance to repay their loan before this happens (with a second bridging loan, for instance), or will negotiate with their lender to extend the initial loan. However, if the property is repossessed it will be sold by the lender, and the proceeds used to repay both the loan and any outstanding interest.
In many cases this is a straightforward process. Often the bridging loan will be used to buy a property whilst a mortgage is arranged, so the loan itself is being used to make the purchase; this means that the lender has a “first charge” on the property. Since their money has been used to purchase the property, they are entitled to reclaim their money through its sale. This form of security is by far the most common amongst the bridging sector, and many bridging lenders will only offer first charge loans.
The ability to borrow against an asset that is already being used as security presents some useful flexibility, however. Especially in the world of commercial finance, a business may not own any of its premises or equipment outright, and may only own them under a hire purchase or a mortgage. Likewise, a developer looking to raise funds for the refurbishment of a property might not be able to provide a first charge security; the property itself may well already be mortgaged, and they may not have any other assets to use instead.
In these situations, it is still possible to secure a bridging loan. However, since the applicant doesn’t outright own any of their assets they are only able to offer a second charge to their lender. A second charge entitles the lender to reclaim their money in exactly the same way that a first charge does, but only once the holders of first charge loans have reclaimed their money. For instance, if a property has both a mortgage and a bridging loan secured against it, the mortgage must be repaid before the bridging loan can be. This exposes the bridging lender to a lot more risk, since it’s less likely that they’ll be able to recoup the full amount of their loan after other lenders have taken their cut.
In some cases, lenders will only agree to match the amount of equity that the borrower holds in their asset; if a mortgage covers 80% of the property’s value, for instance, only the remaining 20% may be used as security. Because second charge mortgages are generally riskier, many bridging lenders simply don’t offer them. Those that do usually offset the increased risk of losing money by charging a higher rate of interest.
Second charge loans offer a valuable tool, even if they are more expensive than first charge loans. Because there’s no requirement for the borrower to outright own a property, they allow the borrower to create more capital. For instance, a business which doesn’t own their premises may still be able to secure a loan to keep up with running costs, which can be vital for the continuation of their business.
Bridging lenders are also very flexible and are able to work with their clients to create an appropriate strategy. This means that in many cases a bridging loan, even a second charge one, can be provided to ensure that opportunities are exploited to the utmost.
A bridging loan is a short-term loan secured against property. It allows you or your business to “bridge a gap” until either longer-term finance can be arranged, or the underlying security or other assets can be sold.
A bridging loan is regulated when it is secured against a property that is currently occupied, or will soon be occupied, by either the borrower or an immediate member of their family. All bridging loans that enable the commercial acquisition of a property or for funds to be raised exclusively for business purposes are not regulated by the Financial Conduct Authority (FCA). The split between regulated and unregulated bridging loans is roughly 50/50 now.
A 1st charge bridge is the principal loan on a property, and it takes precedence over all other charges. A 2nd charge loan meanwhile is secured against a property that already has a loan or mortgage outstanding. 2nd charge loans generally require consent from the 1st charge lender.