Second Charge Bridging: keeping the mortgage you have

What a second charge is

Say you used a high street lender to buy your house. You put down a deposit, they lent you the rest, you completed, all done and dusted.

Go and look at the Land Registry title and you’ll see that lender has the first charge on the property. That means if you sell it, they get their money back first.

A second charge is exactly what it sounds like. It’s a second charge on the same property, sitting behind the first one.

So the queue looks like this. First charge lender. Second charge lender. Then you. You’re third in line for your own money, and that ordering is the reason everything else in this article works the way it does.

Why not just remortgage?

Because sometimes remortgaging is the expensive option, and this is where a lot of people get it wrong.

Say you’re sitting on a rate of 1.5% with two years left to run. You’re not going to get anywhere near that in today’s market. Why would you throw it away to raise some money?

And on top of losing the rate, there may well be early repayment charges on the deal. So you’d be paying a penalty for the privilege of moving onto a worse rate.

That doesn’t make sense. So you look at the other options.

The three ways to raise money without losing your rate

A further advance. Ring your existing lender and ask them for a bit more. If it works on affordability and the equity’s there, they’ll often do it. Start here, because it’s usually the cheapest.

A second charge term mortgage. A completely different lender puts a second charge on the property. Some will go to around six times income on affordability, so this can raise more than a further advance will.

A second charge bridge. Same second charge position, but short term.

The first two are subjects in their own right. What we’re here for is the third one.

So why use a bridge instead of a term?

Two reasons, and it’s usually both at once.

Speed. A second charge bridge moves in days and weeks. A term product moves in months.

Because you’re paying it back soon. A bridge is short-term money. If you know where the repayment is coming from and it’s coming reasonably quickly, you don’t want to be tied into a long-term product to get it.

We’ve had plenty of clients who need to pull money out of a property and put it to work quickly. A business needing to upgrade its systems. A bigger office. A new contract landing that needs funding to deliver. A piece of machinery.

Whatever it is, they need the money now, and they know where the repayment is coming from later.

The three things that decide whether it happens

Every second charge bridge comes down to the same three questions, and they get asked in this order.

1. Will the first charge lender consent?

This is the first thing to check, before anything else.

The first charge lender has to agree to a second charge going on the title. Some are straightforward about it, some are slow, and some are awkward. Which ones are which is half the value of using a broker on these.

And check it every time. Lender policy changes, and what was true last year isn’t automatically true today. Never assume.

If consent turns out to be impossible, that isn’t necessarily the end of it. An equitable charge can sometimes secure the loan without needing their consent at all, though that’s a different conversation with different numbers.

2. Is the equity there?

Most lenders on a second charge bridge will go up to around 70% gross, and some sit nearer 65%.

That’s the combined figure, so your existing mortgage plus the bridge together, measured against the value of the property.

They don’t go higher, and again it’s the queue. They’re second in line. If something went wrong and the property was sold, they get paid after the first charge lender, not before. So they lend less. That’s all it is.

Worth remembering that’s a gross figure too, so the fees and the retained interest come out of it before anything reaches you. There’s a whole piece on gross and net if that’s new to you.

3. What’s the exit?

Anyone who knows me knows I always come back to the exit strategy.

How is this getting paid off? And, just as importantly, what happens if the thing you’re relying on doesn’t happen?

A real one: the kitchen

A client a couple of years back. Property worth roughly £200,000, with a first charge of about £100,000. So around 50% loan to value, and plenty of room.

He wanted a new kitchen. The proper job. Bi-fold doors, the island in the middle, the sofa and the TV, one of those taps where you push it twice and boiling water comes out. All the gizmos.

He needed about £25,000 on top of some savings he already had. And here’s why he couldn’t just wait for it.

The builder had a slot in a month’s time, and nothing after that for another two or three. Good builders get busy and the waiting lists are long.

And the builder offered a discount to take that slot. Do the job in the next month and it comes in cheaper.

So the client had two reasons to move quickly. He’d get the builder he actually wanted, and he’d get money off. Materials were going up in price too, which you could see coming from the state of the economy.

How he was going to pay it back

He had a bonus coming. Around £20,000 to £25,000, in about six months, and it was a guaranteed one, so he was confident.

But the builder wasn’t available in six months, and the discount wouldn’t be there either. So the sensible thing was to bring the work forward and bridge the gap.

We checked the consent first, and it was given. The equity was comfortably there. The exit was the bonus.

Money out in a couple of weeks. Builder paid. Works done. The bonus landed and it was paid off.

The Plan B question, and why lenders ask it

Here’s the part worth paying attention to, because it’s how a lender actually thinks.

They didn’t just take the bonus at face value. They asked what happens if he doesn’t get it. What if he’s made redundant? What if something happens to the business he works for?

That’s not pessimism, it’s the job. They’re running the worst case, and so should you.

So we had a Plan B ready before we started:

• Remortgage and capitalise it. Yes, that means moving off a low rate onto a higher one, and yes, there’d be early repayment charges. But it’s a real, workable way to repay the loan, and it beats losing the property by a very long way.
• A second charge term mortgage. Convert the short-term borrowing into long-term borrowing and pay it down over time.
• A further advance, if the existing lender will do one.

None of those are the plan. They’re what you have ready in case the plan doesn’t turn up.

If you can’t answer “what if the money doesn’t come”, you’re not ready to take the bridge.

One thing worth knowing about regulation

A second charge bridge secured on the home you actually live in is regulated, and that brings the full set of consumer protections with it. Bridging on an investment property usually isn’t.

We’ll tell you which one yours is at the start, not at the end.

When it’s the right tool

Second charge bridging isn’t the answer to everything. But it’s the right answer more often than people realise, and it comes down to a simple test.

Do you need money quickly, do you know where the repayment is coming from, and would remortgaging cost you more than the bridge will?

If that’s three yesses, it’s worth a conversation.

It could be a kitchen. It could be a business that needs funding before a contract starts. It could be a chain break where you need the money before your own sale completes.

Give us a call on 0330 133 4442 and we’ll run through the options.

Figures relate to the circumstances and the lending terms available at the time of that transaction, and the terms available to somebody else may be different. Bridging finance is short-term secured borrowing and it can be expensive. If a secured loan is not repaid in line with its terms, the lender may take enforcement action against the property or any other security provided. This is general information, not personalised advice.