What is a Charge??
A charge, in legal terms, is a form of security granted by a borrower to a lender (investor) over an asset they own. It gives the lender (investor) a claim on that asset, which can be exercised if the borrower fails to repay the loan according to the agreed terms.
What Assets Can Be Charged??
Various types of assets can be used as security for a charge, including real estate properties, vehicles, equipment, or even intellectual property rights. However, the most common asset used for charges is real estate, such as residential or commercial properties.
What is a First Charge??
A first charge, also known as a first legal charge or a first-ranking charge, is the primary security interest held by a lender over a borrower’s asset. It takes precedence over any subsequent charges or liens placed on the same asset by other lenders.
Why Are First Charges Beneficial to Investors??
First charges offer several advantages to investors, including:
Priority in repayment : In the event of default or bankruptcy, the holder of the first charge has the first claim on the proceeds from the sale of the charged asset.Reduced risk: The first charge provides a higher level of security, minimising the risk of losses for the lender.Potentially lower interest rates: Lenders may offer more favourable interest rates for loans secured by a first charge, as the risk is lower compared to unsecured or subsequent charges.
Examples of First and Second-Charge Loans?
The most common example of a first-charge loan is a mortgage, where the lender holds the first charge over the property until the mortgage is fully repaid. Conversely, a second-charge loan, such as a home equity line of credit (HELOC) or a second mortgage, would not be a first charge and has the possibility to recieve little or no protection.
Another example is where a private investor; invests into a property development, they would do this via regulated trustee, in the unlikely event that the development does not proceed, the trustee on behalf of New Capital Links Clients would be paid back first, this offers a high level of capital preservation.
Always check your investment are subject to first legal charge, if there not then please contact New Capital Link for expert advice.
What’s the Difference Between First and Second Charges??
The primary difference between first and second charges lies in their priority of repayment. In the event of default or asset liquidation, the holder of the first charge must be repaid in full before any remaining proceeds can be distributed to the holders of subsequent charges,
Priority of Repayment?
When it comes to repayment, the order of priority is as follows:
First charge holder
Second charge holder
Third charge holder (if applicable)
Unsecured creditors
This order ensures that the lender with the highest level of security (the first charge holder) is repaid first, followed by subsequent charge holders based on their ranking.
Interest Rates
Interest rates for first-charge loans are generally lower than those for second-charge or unsecured loans. This is because the first charge provides the lender with a higher level of security, reducing the risk of non-payment.
Application Process and Eligibility
The application process and eligibility criteria for first-charge loans can vary depending on the lender and the type of asset being charged. Typically, lenders will assess the borrower’s creditworthiness, income, and the value of the asset being used as collateral.
Investment Term Time?
The investment term for first-charge loans can range from a few years to several decades, depending on the type of loan and the agreed repayment schedule.
Key Points to Note When Investing?
When investing in first-charge loans or any other asset-backed security, it’s essential to consider the following key points:
Thoroughly understand the terms and conditions of the investment.
Assess the creditworthiness of the borrower and the value of the underlying asset.
Consider the potential risks and exit strategies.
Seek professional advice from experienced financial advisors or investment introducers.
Property Bond Specialist
New Capital Link is an alternative investment introducer that specialises in connecting investors with attractive investment opportunities, including property bonds and other asset-backed securities. With their extensive expertise and network, they can provide valuable insights and guidance on first-charge investments, helping investors navigate the complexities and make informed decisions.
However, at New Capital Link, we understand that not all security is created equal, which is why we insist on taking out first legal charges against majority of our investment. A first legal charge is the equivalent of the rights a mortgage company has over a home: if the borrower is unable to service the loan, the keys go to the lender, and the property is theirs to dispose of as they choose to recoup their loan.
In more precise terms, the first charge holder is listed on the Land Registry as the primary senior debt holder against that asset and is entitled to exercise their legal right to repossess the asset to protect the interests of that first-charged secured loan. If a loan goes into default, having a first legal charge means that New Capital Link can step in and take control of the asset, ensuring that our lenders get their money back. Our loans are at the very top of the capital structure, which means we are first in line to get our money back. The first charge holder can not only recover the capital but also the interest owed, plus the recovery fees. Those with second-charge loans will get what (if anything) is left, and equity holders, well, good luck to them.
By prioritising first legal charges, New Capital Link provides investors with a higher level of security and a better chance of recovering their investments in the event of a default. Our commitment to taking first charges demonstrates our dedication to protecting our client’s interests and ensuring a safer investment environment.
