There’s a lack of understanding around second charge mortgages, especially among consumers who sometimes confuse them with high-interest financial products such as payday loans. Nothing could be further from the truth. Most of our customers are classified as prime or near-prime, with good incomes and above average credit scores. With that in mind, here are some of the typical questions we get asked.
What is a second charge mortgage?
A second charge mortgage is a loan secured against the equity you’ve built up in your property. For UK homeowners, it’s an alternative borrowing option to remortgaging or taking out an unsecured loan.
It can be secured against UK residential properties and is also known as second charge loans, second mortgages, secured loans or homeowner loans.
What can second charge mortgages be used for?
Subject to your circumstances, you can use a second charge mortgage for almost any legal purpose such as:
- Financing major home improvements. For example, adding an extension to your property
- Consolidating existing loans or credit card debts into one monthly payment
- Paying for a wedding and/or honeymoon
- Paying for a child’s school or university fees
- Funding for cosmetic surgery
- Injecting cash into a business to buy machinery, stock or clear an overdraft
- Paying a tax bill
How do second charge mortgages work?
Second charge mortgages work by letting you use the equity you have in your property as security to provide you with another loan. It sits alongside your ‘traditional’ first charge mortgage and means you’ll have two loans secured against your home.
Who can get a second charge mortgage?
If you’re a UK homeowner with a first charge mortgage and equity in your property, you can apply for a second charge mortgage.
Since March 2016, the Financial Conduct Authority has regulated second charge mortgages, meaning that you have the same protection as a conventional (first charge) mortgage. As a result, an adviser or broker must recommend a suitable product for your specific needs. And, lenders must ensure affordable and responsible lending before approving an application.
Like a conventional mortgage, second charge mortgage applications are assessed considering factors such as your income and credit rating, your property’s value and the equity you’ve built up.
When choosing between your available borrowing options, we recommend you compare the cost and features to decide which mortgage is the most appropriate for your unique situation.
How can I take out a second charge mortgage?
Directly with a lender, such as Pepper Money; or via a broker or intermediary, who’ll recommend a suitable mortgage. The adviser will assess your individual situation with an advised sale and should only offer you a suitable and affordable product. Typically, when you apply, the lender will run a credit check, carry out a property valuation, and need proof of income.
What are the pros and cons of second charge mortgages?
The pros and cons depend on your circumstances. Situations, where they may be a good option include:
If you’re looking to borrow a significant amount
A second charge mortgage could be a good option if you’re looking to borrow a significant sum (typically more than £25,000). Remember, you’re borrowing against the equity you’ve already built in your property. This is because secured lending may give you access to higher borrowing amounts and lower interest rates than an unsecured loan. If this sounds like you, it’s also worth considering remortgaging.
When you’ve got a low rate on your current mortgage that you don’t want to lose
Suppose you’ve already got a great interest rate on your current mortgage. In that case, it may be worth considering a second charge mortgage for your borrowing needs. This is especially true if remortgaging means moving to a higher rate.
If your current mortgage has a high early repayment charge or penalty fee
In this situation, it may be cheaper for you to take out a second charge mortgage rather than to remortgage and pay this fee.
When you’ve got an interest only mortgage that you want to keep
If you’re on an interest-only mortgage, you may not be able to keep this arrangement if you remortgage. If that’s the case, then it’s worth considering a second charge mortgage to borrow the additional funds you need.
If you can’t borrow more from your existing mortgage lender
When your current mortgage lender’s criteria restricts further borrowing, applying for a second charge mortgage may be a feasible alternative for obtaining funds.
If your credit rating is lower than it was when you took out your current mortgage
If your credit rating has worsened, remortgaging may mean paying a higher interest rate on your remaining mortgage balance plus the additional amount you want to borrow. Whereas, taking out a second charge mortgage means that you can keep your current mortgage terms intact and only pay a new rate for your extra borrowing.
When you need to have funds available quickly
A second charge mortgage may be a faster option to access funds than a traditional remortgage when you need to move quickly.
If your income isn’t classified as standard
In recent years, the job market has changed drastically, and high street lenders have been slow to react. If you’re self-employed and only have an accountant’s reference available for proof of income, it can be challenging to access traditional forms of borrowing. This can also occur if you’ve got several unusual income sources, opposed to one source of income. If this is the case, you may find a second charge mortgage a viable and affordable option.
Factors, or cons, that you need to consider when taking out a second charge mortgage include:
The loan is secured against your property
This means your home could be at risk if you default on repayments. This may not affect most borrowers, but it’s certainly something to bear in mind before applying for a second charge mortgage. It’s important to understand that this could come into play if your circumstances change, such as losing your job.
You may end up paying more in total interest
Whilst secured loan rates are often lower than unsecured loan rates. It’s not unusual to pay off the loan over a longer period. This means that even if your monthly payments are less, you may end up paying more interest over the lifetime of the second charge mortgage.
Another product may be more suitable, especially for amounts less than £25,000.
It’s recommended that you seek advice on whether a second charge mortgage is the best option for you. Depending on your circumstances, another product such as an unsecured loan or remortgaging may be better suited.
How much can you borrow on a second charge mortgage?
Although lenders advertise lending figures of anywhere between £5,000 and £2,500,000, the amount you can borrow depends on the equity you’ve built up in your property. The equity is the current value of your home minus the balance remaining on your existing mortgage(s). Subject to their lending criteria, a second charge lender could enable you to borrow up to a maximum percentage of your property’s value less your existing mortgage. This is known as the Loan to Value (LTV).
For example, if you’ve got a £200,000 mortgage balance on a home valued at £500,000 and the lender offers you a 95% LTV, you can potentially borrow up to £275,000 on a second charge mortgage.
Repayment terms are typically between 3 to 30 years, depending on your individual circumstances.
What does second charge mortgage loan to value mean?
The loan to value (LTV) is the loan size that the lender is prepared to offer you in relation to the value of your property. For a second charge mortgage, this is based on the equity you’ve built up – the value of your property less your first charge mortgage balance. Based on your circumstance, some lenders will offer up to 100% LTV on the equity amount.
Can second charge mortgages be used to fund a deposit for a buy to let property?
Yes. Providing you’re eligible they can be used to either totally or partially fund a deposit on a buy to let property.
Second charge or re-mortgage?
The choice to take out a second charge mortgage or remortgage to release additional funds depends on your circumstances. The critical difference is that a second charge mortgage allows you to keep your first charge mortgage in place. As a result, you’ll have two mortgages on your property, as the name suggests. This can be advantageous if you already have good terms on your first charge mortgage, like a low-interest rate. Remortgaging means replacing your existing mortgage with a new one, so you’ll still only have one mortgage. However, the whole amount will be subject to new terms and conditions, including a new interest rate.