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.
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.
Financing major home improvements. For example, adding an extension to your property
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.
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.
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.
The pros and cons depend on your circumstances. Situations, where they may be a good option include:
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.
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.
In this situation, it may be cheaper for you to take out a second charge mortgage rather than to remortgage and pay this fee.
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.
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 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.
A second charge mortgage may be a faster option to access funds than a traditional remortgage when you need to move quickly.
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.
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.
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.
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.
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.
Yes. Providing you’re eligible they can be used to either totally or partially fund a deposit on a buy to let property.
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.
Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.
It only takes a few minutes to get a quote online. See if a homeowner loan could be right for you.
UK Mortgage Lending Ltd (UKMLL) t/a Pepper Money is authorised and regulated by the Financial Conduct Authority (FCA) under registration number 710410 as a provider of regulated mortgages. The FCA does not regulate our Buy to Let mortgages. UKMLL is a member of the Finance and Leasing Association and follows its Lending Code as a provider of second charge regulated mortgages. Registered Office: 4 Capital Quarter, Tyndall Street, Cardiff, CF10 4BZ. Registered in England and Wales under Company Number 08698121.
Pepper Money Limited t/a Pepper Money is authorised and regulated by the Financial Conduct Authority under Firm Registration Number 811609 as a provider of regulated mortgages. The FCA does not regulate our Buy to Let mortgages. Registered Office: Harman House, 1 George Street, Uxbridge, London UB8 1QQ. Registered in England and Wales under Company Number 11279253. Calls may be monitored or recorded for training, compliance and evidential purposes.