First Charge vs. Second Charge
What is a first charge? And how does it compare to a second charge? Before we delve into the finer details lets first cover the basics. In years gone by property crowdfunding and other types of alternative finance were far less common than they are now. Mysterious peddlers of strange and exotic goods? Nefarious crooks hiding behind the veil of the internet? Nobody knew. Up until recently, the world of alternative investment wasn’t anything more than small fry in a pond full of koi. As internet services grew in popularity, however, so did property lending platforms like The House Crowd.
Due to many of the platforms being unregulated at first, there was a general distrust of crowdfunding platforms. Again, as the years went on the more and more platforms became regulated, including The House Crowd, who are now fully regulated by the FCA.
Despite this regulation by the FCA, Property Crowdfunding platforms like The House Crowd are not covered by the Financial Services Compensation Scheme, meaning that any losses experienced are not underwritten by the government. If you invest in a peer-to-peer loan, you are more than likely going to be tied until the loan has been repaid and you won’t be eligible to reclaim £75,000 from the government.
For those wondering, “so what security measures are actually taken to protect my investment?” Don’t worry, there is a layer of potential protection. First charges and second charges are applied to all our peer to peer and development loans. These ‘charges’ provide the lender with a degree of security in the sense that they are made against the value of the borrower’s land or property. Should the borrower default on the loan, then those who have a legal charge will have the right to take the monies from the sale of the property.
A first charge and a second charge differ in the sense that the first charge holds a higher priority when it comes to recovering any assets. The charge can be made against the same assets by more than one lender and once made, put the lender of a position of power to regain the asset.
So now we have the basics down of what a legal charge actually is, let’s take a look at why they’re important and what they do.
What would happen if the borrower doesn’t pay the first charge?
Borrowers,will more often than not tend to not pay second charge loans first. If the borrower stops paying the first-charge holding lender, then in this instance, it’s more than likely that the property will be repossessed. The monies paid out will be delegated to 1st charge holders first. No prizes for figuring that one out!
What happens when a borrower stops paying the second charge?
If a second charge is not paid, this usually means that the borrower has exhausted their financial pot. In this instance, the platform will then repossess and sell the property. The 2nd charge holder will only receive their monies once their 1st charge holders have been satisfied. Generally speaking, 2nd legal charge investments are considered to be riskier than 1st legal charges. Sometimes it could be wrongly assumed that it only matters that to cover the costs of the first charge loans-instead of both the first and second. It should be noted, however, that 2nd charge lenders have the same rights to repossess a property as the 1st charge holders. They just aren’t the first in line.