Second charge business loans: borrowing against property that already has a mortgage

It is a loan secured on property that already carries a first charge, usually a mortgage. The new lender takes a second legal charge. If the property were ever sold or repossessed, the first lender is repaid first from the proceeds and the second lender is repaid from what remains. On registered land, HM Land Registry's practice guide on legal charges explains that registered charges normally rank in the order they are entered on the register, unless the register says otherwise.

Because the second lender stands behind the first, it carries more risk. That shapes everything about the product: how much you can borrow, how it is priced and how closely the lender looks at the property.

• Business owners with meaningful equity in a commercial, semi-commercial or residential property.
• Borrowers on a first mortgage they want to keep, for example a fixed rate with an early repayment charge.
• Companies that need funds faster than a full remortgage would take.
• Businesses that have been declined for unsecured business loans, or need more than unsecured lenders will offer.

It suits less well if the property has little equity, if the first lender is likely to refuse consent, or if the money is only needed for a few weeks, where a bridging loan on a second charge may fit better.

This is the step that most often slows a deal down. Your first lender is being asked to accept that another creditor now has an interest in its security. Many will agree routinely, some take weeks, and a few refuse, particularly if the account has been in arrears or the combined borrowing looks high. Check your mortgage conditions early and tell us who the first lender is, as experienced second charge lenders know which banks tend to respond quickly.

Second charge lending is usually priced above a first charge mortgage to reflect the extra risk. When comparing, look at more than the headline rate:

• Arrangement fees and whether they are added to the loan.
• Valuation and legal costs, including any fee your first lender charges for consent.
• Early repayment charges on the new loan.
• The total cost over the term, compared with a full remortgage including any early repayment charge on the existing mortgage.

Sometimes a second charge is cheaper overall even at a higher rate, because it avoids breaking a fixed rate. Sometimes it is not. Running both sums side by side is the only way to know.

If you are open to replacing the first mortgage, commercial property refinance or a new commercial mortgage can bring all the borrowing under one lender, often at a lower overall cost. A first charge on a different, unencumbered property is another route; our page on secured business loans covers that. If you already have a debenture with a bank, our guide to debentures and fixed and floating charges explains how a new charge interacts with it.

Several lenders on our panel consider second charge business lending. For example, Together says on its own website that it offers secured business loans on a second charge basis as well as a first charge, against property such as offices, retail units, warehouses and investment property. Smart Funding Solutions is an independent broker and is not part of any lender, so we compare second charge appetite across the market rather than one lender's criteria.