A bridging finance loan is a short-term loan usually availed for a period of 6 to 12 months depending on the requirement of the borrower.
The interests repayable calculated on these loans are usually very low as compared to traditional loans because they are secured and they are availed for very short periods.
Because these loans are secured the applicants do not often face rejection. Their loans are usually approved on the basis of the value of the security provided and their existing credit ratings. However, the lenders may take their time even if the value of the property is good but the credit history of the borrower does not meet standard requirements.
The borrower gives charge of the property to the lender and if the borrower defaults or does not repay the loan on the stipulated time then the lender can sell the property in order to get the repayment of the loan.
First Charge and Second Charge loans refer to the importance given to the lenders involved when the borrower has obtained a second mortgage loan on the said property.
The term First Charge is given to the first or the primary mortgage or loan availed against the property in question.
A Second Charge loan can be availed if the mortgaged property still has sufficient equity value left.
The second charge loan is considered secondary in priority when compared with a first charge loan. In the event that the borrower defaults and the mortgaged property is sold to recover the payments, the first charge lender will recover his payments first.
The second charge loan lender will be able to recover his payments only when all the pending liabilities of the first charge lender is completely recovered.
Therefore from a lender’s perspective, it should not be surprising if the second charge lender charges a higher interest rate as the risks taken by this lender is higher.
The first charge bridging loan is availed at a higher Loan-to-Value (LTV) due to the lower risk involved as compared to the LTV given by the second charge bridging loan. Most lenders usually avoid a second charge lending and these loans are harder to get approvals for.
Quite a number of borrowers are under the impression that if payments are regular on the first charge loan then it wouldn’t matter if the payments on the second charge loan are missed.
This misconception needs to be addressed very clearly. The borrowers need to understand that the second charge lender has as many rights to repossession as the first charge lenders.
A bridging loan interest rates can range anywhere from 0.55% to 1.5% for each month of the loan. The rate is calculated on the basis of how risky the loan is for the lender.
There is no specific list of factors that a lender considers while providing the loan as every circumstance of borrowers are different. The interest rate is generally expressed as a monthly rate which seems rather high when compared with other finance options.