Second Charge Mortgages
You may assume mortgages are quite inflexible arrangements, but they’re actually rather versatile and can be used in a number of different ways, for a number of different purposes.
It’s likely, if you already have a mortgage, that the thought of taking out a second one won’t have crossed your mind. Yet, life throws up unexpected challenges that put pressure on your finances, and by extension your mortgage. Though such situations are overwhelming, there is always a way out. For some, second charge mortgages represent the ideal solution.
That said, it’s important that you understand exactly what a second charge mortgage involves so you can decide whether it’s right for you. To help, we’ve put together this piece outlining all the details and answering the most common questions. We will go over:
What is a second charge mortgage?
A second charge mortgage is a loan secured against the equity you’ve built up in a property you already own. In case you are unaware, equity is simply the portion of the property you own outright. For instance, if your home is worth £250,000 and you have £50,000 left to pay on your mortgage, you’d hold £200,000 in equity. Once your mortgage is fully paid off, your equity followingly equals the property’s full market value.
Second charge mortgages are taken out alongside your current mortgage, although they are distinctly separate from one another, meaning you’ll be repaying two loans at the same time. Because it’s secured against your home equity, failing to keep up with repayments would put your property at risk of repossession, as with any loan secured against your home.
How does a second charge mortgage work?
A common misperception is that second charge mortgages work similarly to either buy-to-let remortgages or remortgages to buy a second home, but they’re entirely different. Second charge mortgages work by having you take out an entirely new loan on a property you already own. The new mortgage does not replace the first, nor extend it, but functions independently.
As such, you can take out the second charge with a different lender if they offer more favourable interest rates. You don’t need to live in the property either; landlords can use a buy-to-let property as security. Importantly, the first charge takes priority in the event of repayment issues, hence why your property will be at risk if you fail to keep up with the new loan.
Why would I get a second charge mortgage?
It may seem counterintuitive to apply for a further mortgage when you’re already paying one off, especially given the volatility of today’s housing market. However, a second charge mortgage is a useful way to raise funds for several important reasons.
People typically consider one to finance home improvements, consolidate debts such as credit cards, or fund a major expense like a deposit on another property, a new car, or costs relating to business purposes, for example.
While remortgaging is a popular alternative in these contexts, it isn’t always the most cost-effective option. Remortgaging before your current deal ends can trigger early repayment charges, and you may also lose a favourable fixed rate or face higher rates due to a lower credit score. It could therefore work out cheaper for you to take out a second mortgage rather than remortgaging to release equity. Unsecured loans are another route, but they may not be available depending on your financial situation.
Can I get a second charge mortgage?
Whether or not you can get a second charge mortgage depends entirely on your personal situation. It is a rule, with any form of mortgage, that lenders will subject you to a profile inspection involving their specific set of eligibility criteria in order to determine your suitability as a candidate.
This necessitates an affordability assessment and a hard credit check. Your credit score and any history of CCJs, IVAs, adverse credit, missed payday loans, or bankruptcy will influence a lender’s decision. Such issues reduce your chances of approval, with some lenders even rejecting you for their presence, though others may be more flexible if these occurred over six years ago and your recent financial behaviour is strong. All lenders are different, so the key is finding one that’s right for you.
If you want to get an idea of your current suitability before you apply, you can use our free credit check tool (£14.99 per month after the free 30-day trial). Making use of it will help you in spotting potential mistakes and detecting fraudulent activity so that you can deal with any problems quickly & efficiently. The trial and subscription can be cancelled at any time.
How much can I borrow on a second charge mortgage?
The amount you can borrow on a second charge mortgage is wholly dependent upon how much equity you have in your property, as well as your annual income. As mentioned, lenders need to be certain you can afford the repayments, particularly as you’ll be managing two mortgages at once.
Likewise, interest rates tend to be higher for second charge mortgages, and so this must also be factored into the equation. This is because your first charge lender is paid before the second if your home is repossessed, meaning that the second mortgage lender could be at a loss if the proceeds of the sale do not square both loans.
Your loan-to-value (LTV) ratio is also crucial. Depending on your income and available equity, you might access a 75%, 80%, 85% or even 90% LTV. Lenders calculate the acceptable LTV by considering both your existing mortgage and the proposed second charge, with your equity being the most important factor.
Benefits of a second charge mortgage
You aren’t obliged to pay out early repayment charges on your first mortgage, as you would have to do if you were to remortgage before your term’s official end date.
If your first charge mortgage came with particularly good rates, you won’t lose your lucrative deal by taking out a second charge mortgage.
If your second charge mortgage allows for unlimited overpayments, you could use these to pay off your second mortgage early so as to avoid being charged a considerable deal of interest.
Disadvantages of a second charge mortgage
You’re at risk of losing your property if you fail to keep up with monthly repayments on your second charge mortgage.
You will have to ask permission from select mortgage providers in order to be granted a second charge mortgage.
Two individual mortgages can often be hard to keep on top of financially.
Second charge mortgages usually come with higher interest rates, so you could end up paying more in the long-term.
Further considerations and alternatives to a second charge mortgage
As with any mortgage, there are universal pros and cons to weigh up, alongside further considerations that you should make before going ahead. There are inherent risks to second charge mortgages, which is why you have to be completely certain that it’s the right move for you. For example, if you were to lose your job, would you still be able to make two separate monthly mortgage repayments? Is your credit score suitable? Are your finances in order?
It could be that remortgaging, saving up, dipping into savings, or a personal loan is the better solution even though these alternatives may not appear as such on the surface. Furthermore, if you were to move home you’d be left with a relatively low deposit sum, given that paying off two separate loans for a property would have a substantial effect on your finances.
Second charge mortgages are very unique products which come with unique challenges. This is why it’s so essential that you are given the most coherent advice, so that you don’t waste time feeling confused and frustrated. We at The Mortgage Genie have a comprehensive understanding on how to get a mortgage and are committed to assisting people secure loans of all types.
Every day we help a growing number of people in finding a mortgage deal that’s specifically designed around their personal requirements and financial circumstances, all while guiding them through each step of the journey. If you’re in need of a team of expert mortgage brokers then feel free to contact us today at 01915809890 and we’ll get you on your way towards a perfect property solution! And why not see how much you could borrow up to today by using our mortgage calculator?
The above blog has information contained within which was correct at the time of publication but is subject to change.
FAQs
Can you move house with a second charge mortgage?
If you decide to move home whilst you have a second charge mortgage then you’ll need to settle the loan when you sell your property. Your lender might let you transfer the second charge to your new home, but this depends on the new property’s value, your remaining equity, and your loan’s specific terms.
How do you pay off a second charge mortgage?
A second charge mortgage can either be repaid via monthly instalments, by your making an overpayment or lump sum, or upon selling the property. Clearing the loan will significantly improve your overall financial position by increasing your available equity.
How long does a second charge mortgage take?
Getting a second charge mortgage is generally quicker than securing a first mortgage. Some lenders can release funds within a few days, although, in most instances, you should expect the process to take around three to four weeks from start to finish.
This information is a guide only and should not be relied on as a recommendation or advice that any particular mortgage is suitable for you. All mortgages are subject to the applicant(s) meeting the eligibility criteria of the specific lender. You should make an appointment to receive mortgage advice which will based on your needs and circumstances.