There’s a lack of understanding around second charge mortgages, especially among consumers who sometimes confuse them with high interest products such as pay day 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 re-mortgaging or taking out an unsecured loan.
It can be secured against UK residential properties and is sometimes referred to as second charge loans, second mortgages, secured loans or homeowner loans.
What can second charge mortgages be used for?
Subject to your circumstances they can be used 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 current first charge mortgage and equity in your property, then you can apply for a second charge mortgage.
Since March 2016 they’ve been regulated by the Financial Conduct Authority, meaning that you have the same protection as a conventional (first charge) mortgage. Advisors or brokers must recommend a suitable product. And, lenders must ensure affordable and responsible lending.
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 situation.
How can I take out a second charge mortgage?
Either directly with a lender, such as Optimum Credit. Or go through a broker or intermediary, who’ll recommend a suitable mortgage. With an advised sale the advisor will assess your individual situation 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
Providing you’ve got enough equity in your property; a second charge mortgage could be a good option when you’re looking to borrow a significant sum (typically more than £25,000). This is because secured lending may give you access to higher borrowing amounts and lower interest rates than an unsecured loan. In this situation it’s also worth considering re-mortgaging.
When you’ve got a low rate on your current mortgage that you don’t want to lose
When you’ve got a great interest rate on your current mortgage, it may be worth considering a second charge mortgage if re-mortgaging 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 re-mortgage 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 re-mortgage. 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 existing mortgage lender’s criteria restricts further borrowing taking out 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 re-mortgaging may mean paying a higher interest rate on your remaining mortgage balance plus the additional amount that 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
When you need to move quickly a second charge mortgage may be a faster option to get access to funds than a traditional re-mortgage.
If your income isn’t classified as standard
The job market has changed drastically in recent years 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 or if you’ve got several unusual income sources, then it can be difficult to access traditional forms of borrowing. 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 and could come into play if your circumstances change. For example, if you lost 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.
You should get advice on whether a second charge mortgage is the best option for you. Depending on your circumstance’s another product such as an unsecured loan or re-mortgaging 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 will let you borrow up to a maximum percentage of your property’s value less your existed 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 size of loan 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 re-mortgage to release additional funds depends on your circumstance. The key difference is that taking out a second charge mortgage lets you keep your first charge mortgage in place – so as the name implies, you’ll have two mortgages on your property. This can be advantageous if you’re benefiting from good terms on your first charge mortgage like a low interest rate. Re-mortgaging means you replace your existing mortgage with a new one. You’ll still only have one mortgage but the whole amount will be subject to new terms and conditions including a new interest rate.
Author Sam Marshall, CEO at Optimum Credit. The UK’s leading lender of second charge mortgages.