If you own a home, you almost certainly have a mortgage. But did you know you can get a second-charge mortgage on the same property if you need money for home upgrades or to pay off other debts? In reality, you can get a third and fourth loan as long as you match the lender’s requirements. Read on to learn more about second mortgages and how they work.
What is a Second Charge Mortgage?
The loan you use to buy your house is known as a first-charge mortgage. A second-charge mortgage, often known as a second mortgage, is a secured loan against your house that you can obtain if you already have a mortgage.
It should not be confused with a mortgage for a second house, such as a buy-to-let or property home.
It is a whole new loan from a separate lender, not a loan from your present mortgage lender.
As a result of the epidemic, fewer people took out second-charge mortgages. According to the most recent data from August 2023, new agreements were up 5% from the previous year.
“In recent months, the industry has reported more normal levels of new business, which we expect to continue in the fourth quarter of 2023,” says Fiona Hoyle, Director of Consumer & Mortgage Finance and Inclusion at the Finance & Leasing Association.
Why would you take out a Second Charge Mortgage?
#1. Remortgage rates are unappealing.
If you have a low credit rating, you may end up paying more in interest if you want to remortgage because you won’t be able to access the most competitive options.
Taking out a second mortgage may result in you paying higher interest on the extra amount you want to borrow rather than on your overall mortgage.
#2. High charge for early repayment
If your mortgage has a hefty early repayment charge, it may be less expensive to take up a second mortgage rather than a remortgage.
#3. Self-employed
Because you may be unable to obtain personal loans as a result of your self-employment, a second mortgage may be the only way for you to borrow a reasonably small sum.
Is it possible for me to obtain a Second Charge Mortgage?
Second charge mortgages are only available to homeowners, but you do not have to live in the property to apply. Second mortgages can also be obtained for second homes, as well as for buy-to-let flats and houses. In either case, you’ll need some capital in the property to qualify.
You can calculate your capital by subtracting the amount owed on your first mortgage from the value of your home. If your house is worth £300,000 and you have a mortgage for £100,000, your capital is £200,000.
To obtain a second charge mortgage, you must first obtain authorization from your present mortgage lender, as well as demonstrate to the second mortgage lender that you can afford the repayments on both loans.
What is the Maximum Amount I can Borrow on a Second Charge Mortgage?
The amount you can borrow on a second mortgage is determined by your income and the amount of equity (or capital) in your property. If you have a high income and capital of £100,000, for example, a second mortgage lender may agree to let you borrow the full £100,000 – however, others will set the maximum amount at 75 percent or 80 percent of the available equity.
Typically, the minimum amount you can borrow is £1,000.
What is the Cost of Obtaining a Second Charge Mortgage?
Because second mortgage interest rates are normally higher, you will almost certainly have to pay more interest on your second mortgage than you did on your first.
Second mortgage interest rates are typically higher since the first charge lender is paid before the second charge lender if your house is repossessed – meaning the second mortgage lender may lose out if the proceeds of the sale do not clear both loans.
Second mortgage rates, on the other hand, may still be cheaper than rates on other types of unsecured borrowing, such as personal loans.
The Benefits of Second Charge Mortgages
#1. Long-term
A second mortgage allows you to borrow a large sum of money over a lengthy period of time, perhaps making monthly loan payments more reasonable.
Of course, repaying over a longer period of time will almost certainly result in higher interest payments.
#2. Overpayment
To avoid paying too much interest, you may be able to overpay your second mortgage and pay it off early.
However, the ability to overpay is subject to the terms and conditions of your mortgage, and you may be charged early repayment fees.
The Drawbacks of a Second Charge Mortgage
While second mortgages can be advantageous in some situations, there are several reasons why you should consider other options. A professional mortgage advisor can walk you through all of your options.
#1. Uncompetitive pricing
If you have a terrible credit record and are unable to remortgage, you will most likely be unable to obtain competitive rates, and you may end up paying a greater interest rate on the second mortgage than you would with other options.
#2. It could cost more in the long run.
While a second mortgage may make monthly payments more manageable, you will almost certainly wind up paying more in interest over the long term.
#3. Your house is in danger.
If you can’t keep up with your first mortgage payments, you should absolutely avoid a second mortgage. If you do not make your monthly mortgage payments on either your first or second mortgage, you will lose your property, so this is not a decision to be made lightly.
#4. If you’re using it to pay off debt
Debt consolidation, or borrowing money to pay off other debts, might be a sensible option at times, but there are some important drawbacks to consider.
While taking out a second mortgage to consolidate debt may appear to be a good idea at first—mortgages typically charge lower interest rates than unsecured loans and credit cards—you may find yourself paying more in the long run, as a second mortgage can last up to 25 years.
Furthermore, you would be transforming unsecured debt, such as credit card debt, into secured debt, putting your house in jeopardy.
#5. You might be unable to move.
Any home sale will necessitate the mortgage of both the first and second mortgages. This could leave you with very little to use as a down payment on your future house.
Should I get a second mortgage or remortgage my house?
If you want to use a property to obtain money, you should assess the benefits and drawbacks of taking out a second charge mortgage or remortgage. Which is best for you depends on your circumstances.
When you remortgage while you are locked into a mortgage contract, you will be charged an early repayment charge. You can avoid paying that penalty by taking up a second mortgage.
Although the interest rate on the second loan may be higher, it will be on a lower amount. This must be considered against the cost of the ERC when determining which option is less expensive.
If your financial circumstances have improved, or if the property’s value has increased and your part of the equity has increased, remortgaging may allow you to achieve a reduced interest rate. However, this is not always the case.
It’s possible that your credit rating has deteriorated since you took out the original loan, and you’re now faced with a higher interest rate instead.
Remortgage or second-charge mortgage case study
Your mortgage is worth £300,000, and you’re locked into a 2.5 percent five-year fixed rate for the next four years. Because your home is worth £500,000, the LTV is 60%, which implies you were able to acquire a reasonable interest rate.
You want to raise £100,000 to build a home addition. If you refinance, you will be charged a 3% penalty of £9,000, and your LTV will increase to 80%. The interest rate will rise as a result of this.
Option for remortgaging:
Mortgage total: £409,000 (including 3 percent penalty)
The interest rate is 4%.
Monthly mortgage payments total £2,159.
Keep your mortgage and get a second charge loan:
Mortgage No. 1: £300,000 2.50 percent interest rate Mortgage payments per month: £1,346
£100,000 mortgage, The interest rate is 4.50 percent, and the monthly mortgage payments are £556.
Mortgage payments total £1,902 per month.
According to Fluent Money, a mortgage broker, second-charge mortgage rates range from 3.5 percent to the very top end of 17 percent.
A second-charge mortgage lender will charge you an average of £2,700, plus a broker fee of around £900, plus legal fees.
Remortgages are frequently fee-free, with rates ranging from 2% to 6%.
When is a second charge mortgage less expensive than remortgaging?
If you’re on a fixed-rate mortgage and have to pay early repayment charges for remortgaging, a second charge mortgage may be a cheaper method to raise funds, even if the interest rate is higher.
If your credit rating has deteriorated since you took out your original mortgage on your property, remortgaging may result in you paying extra interest on the total amount of your current mortgage. So, if you choose a second charge mortgage, you will only have to pay the extra interest on the new amount borrowed.
If you can make the repayments, a second charge mortgage may be preferable because it allows you to choose a shorter loan length rather than borrowing more by remortgaging. In this case, your existing mortgage may last for 20 years or more, but the second charge mortgage will last only 10 years, lowering the overall cost of the second loan.
Based on your individual circumstances, you, your lender, or your advisor will need to determine which option is the most cost-effective for you.
What alternatives exist to a Second Charge Mortgage?
While a second charge mortgage can be handy if you need to acquire a large sum of money fast, there are a few other viable solutions.
- A remortgage can increase the value of your home because you might choose to remortgage for a higher amount than the outstanding mortgage. Remortgaging may provide a lower interest rate than a second charge mortgage, but you must consider any potential early repayment charges if you are in the middle of a fixed-rate mortgage. It can be a very good choice if you’re not tied up, or if paying the early repayment charge comfortably makes sense.
- A homeowner loan may allow you to borrow higher sums because you are using your property as security that you will repay the loan. However, if you fail to make your payments on time, your home may be auctioned so that the lender can recoup the money you owe.
Is it possible to receive a second charge mortgage to start a business?
You may be able to use the equity in your house released by taking out a second charge mortgage to establish or expand your business. But, before you consider taking out a loan against your property, consider the following:
- How much will it cost to start your own business?
- Is it likely to turn a profit in the long run?
- Will you be able to afford your mortgage payments (remember, you’ll have two) if you start your own business?
How can I apply for a second charge mortgage?
You can find out how much your present lender would charge for a second mortgage, but you are not obligated to use it. It’s also worth comparing prices to see if you can obtain a better bargain than they can.
When you apply for a second mortgage, the lender will want to establish that you can afford to pay both your current and additional mortgage, so they will examine your income and outgoings. If you’re using the mortgage to consolidate debt, they’ll also want to see a list of debts you intend to pay off. They will also look at your credit history to help them assess the risk of lending to you.
How long does it take to get a second charge mortgage?
Obtaining a second mortgage on your home or apartment is usually much faster than obtaining a first mortgage; some lenders even claim to be able to clear your cash in a matter of days. Most of the time, you should obtain the funds within three to four weeks.
When evaluating second charge mortgage packages, keep in mind to consider the overall cost, including any fees. You should also look at early repayment penalties.
Second Charge Mortgage FAQs
Are second charge mortgages bad?
A second charge mortgage can last up to 25 years, and you may end up paying higher interest rates over time. By converting unsecured debt into debt secured against property, you risk losing your house if you are unable to meet the new, higher mortgage installments.
Are second charge mortgages more expensive?
Due to the additional problems in the case of repossession, lenders are often less on second charge mortgages than they are on first-charge mortgages. As a result, interest rates are usually higher. However, the sooner you pay off a second charge loan, the less interest you will have to pay.
How can I get approved for 2 mortgages?
A credit score of at least 620 is usually required to get approved for a second mortgage, though specific lender requirements may be higher. Also, keep in mind that higher scores correlate with higher rates. You’ll also most likely require a debt-to-income ratio (DTI) of less than 43.
