Commercial Second Charge Mortgages

Commercial Second Charge Mortgages

When it comes to leveraging existing property assets, many landlords, business owners, and commercial property owners overlook one of the most flexible forms of finance available, the commercial second charge mortgage.

Whether you’re a portfolio landlord looking to raise funds for expansion or business growth, or a first-time investor needing capital without refinancing your main loan, understanding how second charges work can unlock new opportunities.

This guide will walk you through the fundamentals, including why a second charge mortgage may be preferable to a first charge, when to consider one, what lenders offer them, and the benefits they provide.

Introduction to Commercial Second Charge Mortgages

A commercial second charge mortgage is a flexible charge loan that enables business owners to unlock the equity tied up in their commercial property. Unlike a traditional remortgage, a second charge mortgage is secured against an existing property that already has an existing mortgage in place.

This type of charge mortgage is often referred to as a second charge business loan and is designed to help businesses raise finance for a variety of needs, such as business expansion, cash flow management, or purchasing new equipment.

Second charge mortgages are particularly attractive because they allow you to access additional funds without disturbing your current mortgage deal or taking out unsecured business loans, which may come with higher interest rates and stricter criteria.

By leveraging the value in your commercial property, you can secure a commercial second charge mortgage to raise finance for your business goals, all while keeping your original mortgage intact. Understanding how these charge mortgages work can help you make informed decisions about the best way to support your business’s growth and financial health.

What Is a Commercial Second Charge Mortgage?

A commercial second charge mortgage is a loan, also known as a second charge loan or second mortgage, and is a type of secured loan secured against a property that already has a first charge (usually a commercial mortgage). The second charge lender takes a secondary legal interest in the property, as this second loan is subordinate to the first. This means they only get repaid after the first lender in the event of a repossession, where property repossession determines the order of repayment and the first lender has priority.

These products are commonly used to raise capital for business purposes without disturbing the existing first mortgage making them a highly strategic option in the right circumstances.

How Commercial Second Charge Mortgages Work

A commercial second charge mortgage operates as a secondary loan secured against your commercial property, sitting behind your primary mortgage. In this arrangement, the second charge mortgage provider holds a subordinate claim to the property, meaning the first mortgage provider is repaid first if there is a default on mortgage repayments.

This structure allows you to keep your existing mortgage while taking out a separate second charge mortgage, resulting in two sets of mortgage repayments, one for each loan.

Interest rates on commercial second charge mortgages are typically higher than those on first mortgages, reflecting the increased risk to the lender. However, these charge mortgages can still be a cost-effective way to raise capital for business expansion, consolidating debt, or covering significant business expenses.

By using a commercial second charge mortgage, you can raise money for your business without having to refinance your primary mortgage, making it a practical solution for many businesses looking to access additional funds quickly and efficiently.

Why Choose a Second Charge Over a First Charge Mortgage?

There are several key reasons why borrowers might choose a second charge instead of refinancing their first charge mortgage:

• If your current mortgage has early repayment charges or exit fees, a second charge lets you raise capital without triggering those fees, which can be more cost-effective than breaking your current deal.
• If you have a low fixed rate on your current mortgage and interest rates have risen, replacing them with a new mortgage at today’s higher rates may not be financially wise. Keeping your existing mortgage deal allows you to save money by avoiding higher interest rates and maintaining favorable terms.
• Second charge mortgages can be arranged more quickly than a full remortgage, thanks to less paperwork and quicker underwriting processes. They may also offer lower interest rates than unsecured loans, helping borrowers save money.

A second charge mortgage allows you to borrow against your property without disturbing your current mortgage deal, so you can maintain your existing mortgage deal and avoid the need to reapply or renegotiate your primary mortgage.

1. Avoid Early Repayment Charges (ERCs)

If your existing commercial mortgage has ERCs, refinancing could be costly, as you may have to pay early repayment charges. A second charge allows you to raise capital without triggering those fees.

2. Preserve a Favourable Interest Rate

Many borrowers locked in low-rate first mortgages in recent years. Replacing them with a new mortgage at today’s higher rates may not be financially wise.

3. Faster Access to Funds

Second charge loans often have quicker underwriting processes, especially when used for business expansion, property investment, or cash flow purposes. However, the speed of accessing funds through a second charge mortgage is assessed on a case by case basis, depending on the borrower’s situation.

4. More Flexible Lending Criteria

Second charge lenders may be more open to complex ownership structures, credit history issues, or properties that fall outside traditional lending policy, as their lender’s criteria for second charge mortgages are often more flexible.

Common Uses for Commercial Second Charge Finance

• Raising deposit for another property purchase
• Funding refurbishments or conversions
• Working capital for your business
• Tax bills or VAT payments
• Debt consolidation across multiple commercial loans
• Bridging a funding gap before a longer-term facility is arranged
• Financing buy to let property purchases or remortgages

This type of finance is particularly attractive to landlords with large portfolios where capital is tied up in existing assets. A second charge mortgage can also allow you to access more money than some other loans, making it a flexible option for landlords and investors.

Second Charge Mortgage Options

Businesses seeking to raise capital through a commercial second charge mortgage have several options to consider. One popular choice is the second charge bridging loan, a short-term solution designed to provide rapid access to funds for time-sensitive opportunities, such as property purchases or urgent cash flow needs. These charge bridging loans are ideal for bridging a financial gap until longer-term finance can be arranged.

Second charge mortgages can also be used to finance investment property acquisitions or to refinance existing borrowing, offering flexibility for a range of business scenarios. With a variety of lenders in the market, including high-street banks and specialist mortgage providers.

Businesses can compare different charge mortgage products based on loan to value, interest rates, and the lender’s criteria. Working with an experienced mortgage broker is essential to navigate the application process, identify the most suitable second charge mortgage, and secure the best possible deal for your business needs.

Alternatives to Commercial Second Charge Mortgages

While commercial second charge mortgages are a valuable tool for raising finance, they are not the only option available to businesses. Alternatives include unsecured loans, which do not require property as security but often come with higher interest rates and lower borrowing limits.

Bridging loans are another option, providing short-term finance for businesses needing quick access to funds, though they typically have shorter repayment terms and may be more expensive than second charge mortgages.

Further advances on existing mortgages can also be considered, allowing you to borrow more against your current property, or you might opt to remortgage your existing property or take out a new mortgage on a different asset.

Each of these options has its own set of advantages and drawbacks, so it’s important to assess your business’s specific needs, the cost of borrowing, and the impact on your existing property and finances. By carefully comparing charge mortgages, second charge mortgages, unsecured loans, and bridging loans, you can select the most appropriate solution for your business.

Eligibility and What Lenders Look For

Lenders will assess both the security property and the borrower’s financial position. Key factors include:

• Current market value and equity remaining in the property
• Existing mortgage balance and lender consent (approval from your existing lender or mortgage lender is often required before proceeding with a second charge mortgage)
• Purpose of funds
• Business or rental income
• Company structure (Ltd, LLP, sole trader)
• Credit profile and experience of the borrower

Some lenders require permission from the first charge lender, though not all do.

Commercial Second Charge Lenders

LTV refers to the total loan-to-value including both first and second charges.

Benefits of a Commercial Second Charge Mortgage

Is a Second Charge Commercial Mortgage Right for You?

A commercial second charge mortgage is an excellent solution when you need to raise capital without disturbing your current mortgage arrangement. Whether you’re funding a new project, investing in another property, or simply need working capital, this type of finance can provide flexibility and speed when used correctly.

While not suitable for every borrower or property, second charges can be a smart tool for portfolio landlords, limited companies, and business owners looking to make the most of their existing assets. The key is understanding the risks and structuring the finance properly with the help of a commercial broker who understands both first and second charge markets.

Get help from an experienced mortgage broker.

You can speak to one of our specialist mortgage brokers who would be able to guide you through the process. They will advise if there is a lender available and the maximum loan amount based on your circumstances. We are a whole of market mortgage brokerage with access to all lenders. Call us on 01332 470400 or complete the form with your details for us to give you a call back.

FAQs