Second charge mortgages are loans secured on property that has already been mortgaged. As second charge loans are distinct from regular mortgages, they can and generally do have different terms. Keep reading to learn more about second charge mortgages and their pros and cons.
How does a second charge mortgage work?
How second charge mortgages work is much the same as how regular mortgages work. One key point to note is that, as with regular mortgages, second charge mortgages are secured against the property. This means that your home is potentially at risk if you are unable to repay the loan.
Pros of second charge mortgages
Second charge mortgages have three main pros. These are as follows.
No impact on your current mortgage
If you have an extended period on your current mortgage terms, it may be very much in your best interests to leave it undisturbed.
Some lenders may charge you an early repayment charges if you exit the agreement early. Even if they don’t, you may not be able to remortgage on terms that are as favourable as the ones you have now.
Lower interest rates than for unsecured loans
Lenders tend to offer lower interest rates on second charge mortgages than on unsecured personal loans. This means that the total cost of borrowing tends to be lower. Borrowers may also find it easier to obtain second charge mortgages than unsecured personal loans.
You retain full ownership of your property
With equity release, you give the lender a stake in your home. This means that you (or your heirs) will get less benefit from any future increase in its value.
Cons of second charge mortgages
Second charge mortgages have three main cons. These are as follows.
They can be challenging to obtain
Both regular mortgages and regular unsecured loans are in higher demand than second charge mortgages. This means that more lenders provide them, resulting in a relatively high level of competition between lenders.
By contrast, in the second charge mortgage market, the level of competition is much lower, providing less scope for borrowers to strike good deals by shopping around. There is also less leverage for borrowers to negotiate with lenders.
They can be expensive
Setting up a second charge mortgage tends to come with fees similar to a regular mortgage. These would usually include arrangement fees, valuation fees and legal fees. Additionally, second charge mortgages typically charge higher interest rates than regular mortgages.
It’s also worth noting that second charge mortgages will be listed on a borrower’s credit history, and you need to let your current mortgage lender know. They may be looked on unfavourably by other potential lenders. This may increase the cost of other borrowing.
They are directly secured against your home
Second charge mortgages give lenders a direct route to making a claim on a property.
It is, however, important to note that creditors with unsecured debts can apply to a court for a charging order against a property. This effectively converts unsecured debt into secured debt.
Realistically, therefore, a homeowner’s property is at risk with any type of credit.
Second charge mortgages and estate planning
The fact that second charge mortgages leave you with full ownership of your property can be a drawback as well as a benefit.
For example, if you wish to reduce the value of your estate, then it may be in your best interests to sell a stake in your home, for example by using equity release.
How to decide if a second charge mortgage is right for you?
The starting point for deciding if a second charge mortgage is right for you is how you intend to use the money. Specifically, is it mainly for debt consolidation or for another purpose?
Second charge mortgages and debt consolidation
If you’re considering using a second charge mortgage to consolidate debts, then it’s best to seek independent, professional financial advice. They can help calculate what reductions you could make to your monthly budget and whether you’re paying the debt back over a more extended period, which could mean you pay more over the entire loan length
If you’re struggling with debts, you may wish to speak with a debt counsellor, who will be able to go through all the different options with you. They will help you to pick the best one for you and your situation.
Second charge mortgages for other purposes
If you’re considering using a second charge mortgage for another purpose, your starting point is to decide if you can afford further borrowing.
If you’re sure you can, then your next step is to identify what other sources of finance are available to you. You can then compare the cost of a second charge mortgage with the costs of other options.
When you do this, be sure to compare the total cost of the debt. This means the set-up costs and the interest over the life of the loan. Remember that loans with low interest rates could be more expensive than loans with higher interest rates if they are for a longer term.
If you still have questions, check out our frequently asked questions.
Top tips for applying for a second charge mortgage
Here are three top tips for applying for a second charge mortgage.
1. Check your credit scores. Look for mistakes, missing information, and out-of-date details. If you spot any issues, deal with them before you apply.
2. Get all your documentation together. This will avoid delays in processing.
3. Get professional advice. Second charge mortgages are not to be entered into lightly. It’s important that you speak with a qualified financial or mortgage adviser who can help you determine if a second charge mortgage is the right product for you. Once you’re ready to apply, get in touch with one of our trusted broker partners. They will help you apply for a homeowner loan that suits you perfectly.