First Charge vs Second Charge Bridging Loans: What's the Difference?

When someone contacts us about a bridging loan, one of the first things we need to establish is whether they're looking for a first charge or second charge loan.

It might sound like legal jargon, but the distinction is actually quite straightforward. It comes down to where the lender sits against the property and whether there's already a mortgage in place.

Understanding the difference can help you decide which option is likely to suit your circumstances and avoid unnecessary costs along the way.

What is a first charge bridging loan?

A first charge bridging loan is secured against a property as the lender's primary security.

If there isn't an existing mortgage, or the bridging loan will replace it, the bridging lender takes the first legal charge over the property. In simple terms, they're first in line to be repaid if the property is sold.

This is the type of bridging loan most people think of. It's commonly used when buying a property, completing an auction purchase or funding a refurbishment before moving onto a longer-term mortgage.

For example, if you've found a property that needs renovating and a standard mortgage isn't an option yet, a first charge bridging loan can provide the funds to buy it quickly. Once the work has been completed, you may refinance onto a buy-to-let mortgage or sell the property.

What is a second charge bridging loan?

A second charge bridging loan works differently because there's already a mortgage secured against the property.

Rather than replacing that mortgage, the bridging loan sits behind it. The original mortgage lender keeps the first charge, while the bridging lender takes second charge.

This allows you to release equity from your property without disturbing your existing mortgage.

That can be particularly useful if you're on a competitive fixed-rate mortgage or would face early repayment charges by remortgaging.

We've seen borrowers use second charge bridging loans for everything from funding refurbishment projects to raising capital for a business opportunity or covering a tax bill while waiting for another asset to be sold.

So, what's the main difference?

The biggest difference is simply who has priority over the property.

With a first charge bridging loan, the bridging lender has first claim over the security.

With a second charge bridging loan, another lender already has that first claim, and the bridging lender ranks behind them.

Because of this additional risk, second charge bridging loans often have slightly higher interest rates than first charge loans. However, that doesn't necessarily mean they're more expensive overall.

If replacing your current mortgage would mean paying early repayment charges or losing a very low interest rate, keeping that mortgage in place and taking a second charge loan could work out to be the better financial decision.

Every case is different, which is why it's important to look at the overall picture rather than comparing interest rates alone.

When would a first charge bridging loan be suitable?

A first charge loan is often the right choice when you're purchasing a property or refinancing one that doesn't need to keep its existing mortgage.

Typical situations include:

• Buying a property at auction where completion needs to happen quickly.
• Purchasing a property that isn't currently suitable for a traditional mortgage.
• Funding refurbishment works before refinancing or selling.
• Preventing a property chain from collapsing.
• Buying below market value opportunities.

In these situations, speed and flexibility are often just as important as the funding itself.

When might a second charge bridging loan make more sense?

Second charge bridging loans are generally used when there's already a mortgage that you'd rather leave untouched.

For example, you may want to:

• Raise funds for refurbishment works.
• Release equity for a business investment.
• Cover a short-term cash flow requirement.
• Pay a tax liability before another property is sold.
• Avoid paying early repayment charges on your existing mortgage.

Rather than replacing what you already have, a second charge loan allows you to borrow against the equity that's built up in the property.

Can you get a bridging loan if you already have a mortgage?

Yes.

Having an existing mortgage doesn't automatically prevent you from taking out a bridging loan.

The lender will consider factors such as how much equity is available, the property's value, your plans for the loan and, importantly, how you intend to repay it.

Every bridging loan should have a clear exit strategy, whether that's selling the property, refinancing onto a longer-term mortgage or using another agreed source of repayment.

First Charge vs Second Charge Bridging Loans: At a Glance

Which option is right for you?

There's no single answer because every property transaction is different.

If you're buying a property or replacing an existing mortgage, a first charge bridging loan is often the most appropriate solution.

If you're happy with your current mortgage and simply need to release additional funds for a short period, a second charge bridging loan could be worth considering.

The best option depends on your circumstances, the property and what you're trying to achieve.

That's why, at Mercantile Trust, we look at every application individually. Rather than relying solely on automated decisions, our team takes the time to understand the transaction and discuss the most appropriate way to structure the loan.

If you're unsure whether a first or second charge bridging loan is right for your circumstances, we're always happy to talk through the options before you make a decision.

Reviewed by: Tara Evans, Chief Executive