Almas Uddin
Founder and Mortgage Advisor
27 Feb 2024
Is it Possible to Get a Second Charge Commercial Mortgage?
A second charge loan agreement works as an additional mortgage product secured against a property. Can you get a second charge commercial mortgage in the UK? In short, yes, there are varied products and options to apply for this type of mortgage.
However, as with most secured loans, the right second charge commercial mortgage will depend on your requirements, financial position, the premise, and how well you meet your selected lender’s eligibility requirements.
In this guide, Revolution Finance Brokers explains how second charge loans UK work for business applicants and covers all the essential information you should know before you apply for a commercial second charge mortgage loan.
Taking Out a Second Charge Mortgage Loan as a Business
Second charge commercial mortgage products work much the same as any other secondary mortgage, with the equity in the business premise used as security. That means if the business were unable to repay the second charge mortgage loan, the lender could repossess the property and recoup the debt from the proceeds.
The reason a second charge commercial mortgage is normally more expensive in interest costs than a first charge mortgage is that the second lender is second in priority in a repossession scenario – hence the stricter criteria to offset the risk.
Businesses can apply for second charge loans UK from varied lenders but often find that this more specialist product is not available from all mainstream banks or mortgage providers.
Revolution Finance Brokers, as an independent and whole-of-market broker, can recommend niche lenders and commercial loan specialists who offer second charge bridging loans UK or second charge mortgage products that are aligned with your needs.
Borrowing Limits on a Second Charge Commercial Mortgage
The primary factor in working out how much you can borrow on a second charge commercial mortgage is the equity you own in the premise. Your equity is the property value less the amount outstanding on your initial mortgage.
For example:
- A business owns a property worth £300,000.
- It has £100,000 outstanding on its first charge mortgage.
- The equity owned is the difference, or £200,000.
Second charge commercial mortgage lenders will offer a Loan to Value, or LTV, as a proportion of that equity, often to a limit of roughly 50% to 65%. Therefore, in our example above, the business could apply for a second charge commercial mortgage of between £100,000 and £130,000.
Of course, equity isn’t the only eligibility factor, and before you can proceed with a second charge loan agreement, the lender will need to assess other aspects such as your finances, credit and the nature of the business.
Benefits of Applying for a Second Charge Mortgage Loan on a Business Property
Businesses opt to apply for a second charge loan agreement for many reasons, but often because they have an existing commercial mortgage and wish to raise additional financing, which is unavailable or uncompetitive, through the original lender.
You could apply for a second charge commercial mortgage to renovate or refurbish the property, build an extension, install a new car park, or make other alterations to your business premise.
Some lenders offer second charge bridging loans UK specifically designed for these financing requirements, whereas others will provide either repayment or interest-only second charge loans UK, so there is normally a solution that will suit your expectations.
Below we run through some of the typical reasons British companies apply for a second charge commercial mortgage:
- Expanding the premise or property, renovating or upgrading a shopfront or making other improvements to the site.
- Raising financing to invest in business innovations such as new equipment that will improve revenues – using the property as security against the loan.
- Funding a deposit or down payment toward a new premise to increase the number of business outlets or developing a new site to help scale the business upward.
The reason for your second charge commercial mortgage may influence the lender we recommend, so it is often useful to have a discussion beforehand to ascertain the circumstances. For instance, some second charge mortgage loan lenders will be happy to consider a second charge commercial mortgage for any purpose, whereas others may turn down commercial applicants looking to consolidate debt.
Typical Interest Rates on a Second Charge Commercial Mortgage
Lenders offering second charge loans UK will offer the lowest interest rates to businesses with a strong application where they can demonstrate they meet the lending criteria and have little risk of defaulting on the payments.
Although commercial mortgage rates tend to be higher than residential mortgages, and second charge commercial mortgage rates are higher again, businesses can make substantial savings by working with an experienced broker to negotiate with the lender on their behalf.
Each second charge commercial mortgage provider will have different policies and lending guidelines, but all will assess:
- Affordability – the value of other debts, average business incomes, and financial stability.
- Business – the likelihood the business will continue trading and has a robust business model.
- Deposit – the equity in the property, the property value, and any deposit available.
- Credit – the company’s credit history and any adverse occurrences that mean the lender perceives the business as higher risk.
The application requirements for a second charge commercial mortgage are similar to those for a first business mortgage, and lenders will often incorporate the expected impact of the funding – such as increased revenue following a renovation – before making any lending decisions.
However, lenders will also wish to analyse the businesses’ trading history to ensure any second charge business loan exemption rules do not apply and verify that the company’s projections about future profitability are accurate.
Alternatives to a Second Charge Commercial Mortgage
There are often varied funding products which may be suitable, and our commercial consultants can advise on the options we think match your requirements best. Alternatives to a second charge commercial mortgage might include:
- Remortgaging a first charge mortgage, depending on the interest rates available and whether the first mortgage lender will increase the lending.
- Short-term business loans to cover costs such as refurbishing a commercial premise, usually available up to £25,000.
- Asset financing using another asset aside from the property to secure a loan. The security asset could include equipment, vehicles or even debts.
- Second charge bridging loans UK – similar to a second charge commercial mortgage but with a shorter repayment period for projects expected to conclude within a year or so.
If you would like further information about applying for a second charge commercial mortgage or to evaluate which products are optimal for your company, please contact Revolution Finance Brokers at any time.
FAQs
What Is a Second Charge Commercial Mortgage?
A second charge commercial mortgage is a mortgage secured against the business premise, in addition to an existing mortgage product, and secondary in priority in terms of repossessions where the first lender would be repaid first should the business close or become insolvent.
Applying for a second charge commercial mortgage is very much the same as applying for a first charge mortgage, although the lender will assess slightly different criteria to decide whether to make a funding offer.
Can Any Business Apply for Second Charge Loans UK?
Theoretically, yes, any business that owns a property and has equity can apply for a second charge commercial mortgage. However, there are many funding options, and if your company is not eligible for a second charge mortgage or you do not meet any of the standard qualification conditions, there are other solutions available.
How Are Second Charge Bridging Loans UK Different From Second Charge Mortgages?
Bridging loans are comparable to mortgages but have a shorter timespan, with most lasting around one year, although shorter and longer loan terms are available. Second charge bridging loans UK vary from second charge mortgages because the lender will charge higher interest rates and offer the lending over a shorter period.
Are Second Charge Mortgages More Expensive?
Yes, a second charge commercial mortgage is normally a little more costly than any other mortgage product – but it will also commonly be more cost-effective than a short-term loan or another financing source.
What Is a Second Charge Business Loan Exemption?
Exemptions can refer to several scenarios – sometimes because a second charge business loan is exempt from FCA lending requirements and limitations as a commercial rather than a residential product. Lenders may also apply exemptions, depending on their rules and policies around second charge commercial mortgage products.
What Does Second Charge Mortgage Mean?
A second charge commercial mortgage is the same as a normal business mortgage but is the second security charge held against the premise. Therefore, lenders normally offer higher rates because the risk is higher than with a first charge mortgage, where the mortgage provider has first priority in recouping their outstanding debt in a repossession scenario.
How Can a Broker Help Find a Competitive Second Charge Loan Agreement?
Independent brokers like Revolution Finance Brokers have strong, established networks across the UK lending sector and can discuss client requirements and circumstances directly with the lenders they think are the ideal option for the business.
That means, as your broker, we don't simply signpost the products we think will work best, but negotiate the rates and charges, help with the paperwork completion, and liaise with the lender until the second charge loan agreement is confirmed.
Is a Second Charge Mortgage Loan the Right Option for Business Financing?
A second charge commercial mortgage can be beneficial in many situations but is one of several possible solutions. We recommend getting in touch with our capable commercial financing team if you would like independent advice about whether this product is suitable for your requirements.
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