We are experts at giving advice on second charge mortgages. If you are considering this option or would like to find out whether it could be suitable for you, read on and find our more.
What is a second charge mortgage?
A second charge mortgage is a secured loan that uses the capital (or equity) in your home as collateral. It is based on the difference between the value of the property and the amount you owe on your first mortgage.
Taking out a second charge mortgage allows you to use your home to borrow more money, for example to cover the cost of home improvements you may be planning.
It is an alternative to remortgaging, in order to access additional borrowing on your home, especially if you will face penalties if you redeem your existing mortgage
A second mortgage is completely separate to your existing mortgage. It can be a good way to access extra funds without remortgaging. However, it will mean you have two mortgages to pay off on the property.
If you become unable to pay either your first or your second mortgage, your home could be repossessed as a result.
What are the drawbacks of taking out a second-charge mortgage?
- You could lose your home if you fall behind on the repayments – making a second mortgage a bad idea if you are struggling financially.
- You will have to pay off both mortgages in full if you move, which could leave you with very little deposit.
- You will generally pay a higher interest rate than on your first mortgage, which is why many people choose to remortgage instead.
Why might I consider a second mortgage?
- If you will face big early repayment charges or penalties for switching away from your current mortgage deal.
- You are on a particularly good deal already, and therefore remortgaging would mean paying a new higher interest rate across the whole borrowing amount
Can I get a second charge mortgage?
Only homeowners can take out second charge mortgages, but you do not have to live in the property to apply. Second mortgages can also be taken out on second homes and Buy to Let properties. Whatever the property type you will need some capital built up in the property to qualify.
You can work out how much capital you have by deducting the amount you owe on your first mortgage from the value of your home.
To take out a second charge mortgage, you will also need to get permission from your existing mortgage lender, and to prove to the second mortgage lender that you can afford the repayments on both loans.
What are the benefits of taking out a second charge mortgage?
- You can keep your existing mortgage deal – which could be particularly valuable if either interest rates have gone up or your credit rating has gone down
- You don’t have to pay early repayment charges or penalties to remortgage now
- You don’t have to extend the term of your current mortgage deal
- Secured loans tend to be easier to access than unsecured personal loans, particularly if you are self employed.
How long does a second charge mortgage take?
Taking out a second mortgage on your house or flat is usually a lot quicker than securing a first mortgage, some lenders even claim they can clear your funds in a matter of days. In most cases, you should have the money within three to four weeks.
How much can I borrow on a second charge mortgage?
The amount you can borrow on a second mortgage will depend on your income, and the amount of equity (or capital) you have in your property. If, for example, you have a high income and capital of £100,000, a second mortgage lender might agree to let you borrow the full £100,000 – although some will cap the maximum amount at 75% or 80% of the equity available. The minimum amount you can borrow is usually £1,000.
How much does it cost to take out a second charge mortgage?
Second mortgage interest rates are generally higher, so you will probably have to pay more interest on your second mortgage than on your first.
The interest rates on second mortgages are usually higher because the first charge lender is paid before the second charge lender if your home is repossessed – meaning the second mortgage lender could lose out if the proceeds of the sale fail to clear both loans.
However, second mortgage rates may still be lower than on other forms of unsecured credit such as a personal loan.