As many businesses seek to squeeze money from their assets, second charge loans on a commercial property have become an option.
What Is A Second Charge Mortgage?
Borrowing on a second charge means taking a loan on a property with an existing commercial mortgage a different lender. Specifically, the second charge lender takes a security on the existing equity in the property. If the borrower runs into repayment problems and the property needs to be sold then the lender of the first charge mortgage will be served first.
Why Are Second Charge Loans For Businesses More Expensive?
This also explains why second charge loans are more expensive than first charge loans: because second charge lenders take a higher risk when lending on a property with an existing mortgage this type of loans has higher rates.
That said, second charge loans are usually quick to arrange. Therefore, consider them as emergency money in case of unforeseen circumstances.
What To Use Second Charge Loans For?
Commercial businesses often need finance to expand and renovate, to buy new furniture and equipment, or to extend their business premises.
In addition, a second charge mortgage can be used to finish a partially developed property, buy a business property for investment or lease office, industrial or manufacturing units.
Second Charge Commercial Mortgages
There are a few reasons a second charge mortgage may be the better alternative to remortgaging, for example:
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High Early Repayment Charges on Your Existing Mortgage
If the existing mortgage on a commercial property carries high penalty charges in case of remortgaging, taking out a second charge loan while keeping the mortgage in place may be the cheaper solution.
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You Already Have A Great Low Interest Mortgage
Provided your existing mortgage is interest only and can hardly be beaten on interest rates, it may be better to stay with it and take a second charge loan instead.
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Your Mainstream Lender Rejects Your Business Loan Application
If the funding you require exceeds £25,000 and your bank does not want to provide an unsecured business loan, a second charge mortgage on your commercial premises may be a viable alternative.
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You Need To Raise Finance In Time
While prime lenders often charge the lowest rates they can take several months to secure a business loan. Because challenger banks and commercial lenders can often make funds available within four to six weeks they can help realise projects in time.
Loan To Value And Interest Rates
Typically, you can expect to raise 60-65% of Loan To Value with a second charge mortgage. Because this type of loan is secured, rates usually range between 5 and 9%. Depending on your level of credit and the lender you can take out either an interest only or a repayment second charge loan.
Am I Eligible For A Second Charge Commercial Mortgage?
In order to be eligible for a second charge commercial mortgage, your application to a lender needs to demonstrate that
- your business is viable,
- there is substantial equity in your mortgaged property and that
- your business can afford to repay the second charge loan.
A solid cash flow and realistic cash flow projections are as important as a strong trading and credit history.
To discuss your individual funding requirements and business situation please get in touch for a free consultation.