Second Charge Mortgages
You may think that mortgages are quite obstinate and rigid deals, that there is a set standard which isn’t deviated from. However, mortgages are actually rather versatile and can be used in a number of different ways, for a number of different purposes.
It’s likely, if you’re already on a mortgage plan, that the thought of getting an additional mortgage on top of your current one won’t have crossed your mind. And yet, unexpected occurrences happen in life all the time, those that place us in uneasy situations. Of which, the first and foremost aspect of our wellbeing to be affected is our finances. As a consequence, this implies the mortgage we are attached to, given that it is the investment which requires the most attention and effort, usually for the longest period of time. Finding yourself in such a tricky scenario can feel like the end of the world, but there is always a way out, whatever the specifics are. In this context, second charge mortgages represent an ideal solution if your individual situation and financial circumstances accordingly align.
Having said this, discerning what the right mortgage decision is for you can prove to be a remarkably complex procedure, with the process itself coming with even more inherent complications. You’re required to make a thorough & accurate assessment of your extant profile and background, all while judiciously selecting an appropriate lender. Moreover, not all lenders are qualified to provide you with a plan that is tailored to your specific needs. It’s for this reason why we firmly suggest hiring an expert mortgage broker to help guide you through each step of the way. Here at The Mortgage Genie we have aided a vast deal of our clients by getting a second charge mortgage for them. If you’re interested in joining the many who comprise our success stories, then be sure to give us a call today at 01915809890.
In spite of the service which we can provide for you, it’s still salient that you familiarise yourself with everything there is to know about second charge mortgages so that you’re certain it’s the correct decision for you beforehand. To help you inform yourself on the matter, we’ve written this piece which goes over all the important details and answers the commonly-associated questions. We will go over:
- What is a second charge mortgage?
- How does a second charge mortgage work?
- Why would I get a second charge mortgage?
- Can I get a second charge mortgage?
- How much can I borrow on a second charge mortgage?
- Advantages of a second charge mortgage
- Disadvantages of a second charge mortgage
- Further considerations & alternatives to a second charge mortgage
What is a second charge mortgage?
Simply put, a second charge mortgage is a type of loan which uses the equity that you have built up in a property you own (first charge) as collateral. In case you are unaware, equity refers to the portion of a house’s capital that the homeowner owns outright, as opposed to that which is in the hands of the mortgage provider. For instance, if you had £50,000 left to pay on a mortgage for a property valued at £250,000, then you would have £200,000 worth of equity. Followingly, if you had already completely paid off your entire mortgage loan, then your capital would be directly equal to the property’s overall market value.
Second charge mortgages are taken out alongside your current mortgage, although they are distinctly separate from one another. Ultimately meaning, that you will be paying off two mortgage loans simultaneously if you decide to opt for this route. Moreover, because you would be using your current home equity as a guarantee if you ever failed to keep up with the usual monthly repayments, this characterises second charge mortgages as being a type of secured loan. And, as is the deal with any loan secured against your property, the vital implication is that your home has the potential to be repossessed if you aren’t able to satisfactorily make those necessary repayments regularly.
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, it should be stated that these are not to be confused with each other. Second charge mortgages work by having you take out an entirely new loan on a property you already own. In essence, the new mortgage does not replace the first, nor top it up, but functions independently.
Consequently, you can get a second charge mortgage from an entirely different lender if you want, one who perhaps offers a better package which entails relatively favourable interest rates. Another point to note is that, while you do have to have an initial mortgage on a property, you don’t need to live inside the home in order to take out an additional loan. And so, if you are acting as a landlord, then you can use your buy-to-let property as security against the second mortgage. Importantly, second charge mortgages take precedence over your first charge mortgage, hence why you could lose the latter if you fail to adequately fulfil monthly repayments on the former.
Why would I get a second charge mortgage?
At first, it may seem counterintuitive to apply for a further mortgage loan when you’re already currently paying one off. After all, even just one mortgage can be difficult enough to handle, especially taking into account the volatility of today’s housing market. However, second charge mortgages symbolise a method of raising funds for a variety of essential reasons.
The primary situations which lead people to consider getting a second charge mortgage are those, firstly, where they want to comfortably finance home improvements, whether the involved renovations are out of necessity, or to simply increase the total value of their property. Secondly, an individual might have accumulated a substantial amount of debt from credit cards or otherwise, a second charge mortgage affords a way to consolidate any outstanding debt. And lastly, a second charge mortgage could be used for a mortgage deposit on another property or a large purchase, such as for a new car or those relating to business purposes.
Of course, a popular alternative way of funding the above instances is by remortgaging. Generally, though, the ideal time to remortgage would be when your current mortgage term is coming to an end. Reason being, that switching before your term’s end means paying any early repayment fees and charges, and these can turn out to be quite costly. As such, it could work out cheaper for you to take out a second mortgage rather than remortgaging to release equity. Additionally, if you’ve been on a fixed rate mortgage with good interest rates for some time, it’s probable that interest rates have changed since then, or that your credit score has worsened, and so only higher interest rates might be available now. On the other hand, a lot of people choose to get an unsecured loan instead. But, this may not be feasible for you, owing to your personal financial circumstances not allowing for it. In this light, the viability of a second charge mortgage is made clearly visible.
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.
Namely, all lenders need to be assured that each of their clients are capable of keeping up with the typical monthly repayments, regardless of the agreed-upon deal. Foremostly, this necessitates an affordability check, alongside a hard credit check. From there, they will determine your money management eligibility based on your credit score and whether you’ve ever had a court county judgement (CCJ), an IVA, adverse credit, or if you’ve ever failed to meet payday loans or filed for bankruptcy in the past. If you have any of these listed elements recorded on your file, then they will work to negatively impact your chances of being accepted for a second charge mortgage, with some lenders even rejecting you for their presence. Albeit, if they occurred six or more years ago, and you’ve exhibited good financial behaviour since, it’s possible for a lender to be forgiving. It should be borne in mind that all lenders are different, the integral part is finding a lender 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 annual income. As stated previously, lenders need to be certain that you can afford a mortgage’s monthly repayments before they consider accepting you. This is especially so in the case of a second charge mortgage, where you would be paying off 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.
The second crucial detail is what loan-to-value (LTV) ratio you want on your second mortgage. I.e., what percentage of your desired home does your income & capital allow you to purchase? This could be a 75% LTV mortgage, a 80% LTV mortgage, a 85% LTV mortgage, or a 90% LTV mortgage. If you have a relatively high income, and you have a substantial degree of equity, then your lender may permit you to borrow the full amount of your property’s total value. Mortgage providers will calculate the LTV ratio they’re willing to accept for a second charge mortgage by combining the proposed value with that of your existing mortgage, although your equity plays the biggest role here.
Advantages 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.
- You can retain the same term which you have on your first charge mortgage.
- 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.
- Despite monthly repayments being more affordable, you could end up paying more in the long-term.
Further considerations & 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 venturing forth. 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, and followingly, 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 & 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. We hope that this article has been useful in dispelling your doubts and addressing any queries you may have had surrounding second charge mortgages.
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?