When it comes to mortgages, there are a few different types that you might come across. For UK homeowners, a second charge mortgage is one option that can provide some benefits if used correctly. It enables you to borrow money on top of your main mortgage.
In this article, we’ll take a look at what a second charge mortgage is and how it works. We’ll also explore some of the reasons why someone might choose this type of mortgage over others. Finally, we’ll discuss the pros and cons of taking out a second charge mortgage so that you can make an informed decision if this is something you’re considering.
What is a second charge mortgage loan?
A second charge mortgage is a loan from a new lender which is secured against your property, as with a traditional first-charge mortgage. You will therefore have two mortgages with different lenders. However, the new mortgage sits ‘behind’ the original mortgage on your home, in second place.
So your main mortgage has a ‘first‘ charge.
And the secured loan has a ‘second‘ charge.
In the event of repossession, the ‘first’ charge gets paid out first, as it has the highest priority, and then any money leftover can be passed to the ‘second’ charge.
When you take out a second charge mortgage, you will still be required to keep up with payments on your existing mortgage – but any money that comes from the second loan can then be used for whatever purpose you choose.
What is a second charge on a property?
It is important to note that a second charge mortgage is still a loan secured against your home, so if you were to default on the repayment of the loan then this could result in repossession of your property.
The lender will place a ‘second charge’ on your property and this is formally registered at Land Registry. If your main mortgage lender refuses to give permission for the second loan, then some lenders will lend via an ‘equitable charge‘.
Confusingly, you may also find these loans called homeowner loans, second mortgages or secured loans. They are all basically the same thing.
Our article How many mortgages can you have? looks at how many mortgages can be associated with one property and also what limits apply to each borrower. Can you have as many mortgages as you want?
Available for a wide variety of purposes including:
- Debt consolidation
- Purchasing a new car
- Home improvements
- School/University fees
- Wedding
- Business investment
- Unexpected bills
- Transfer of equity
How do second charge mortgages work?
When it comes to second charge mortgages, the amount that you can borrow is based on the equity in your property. This means that if you have owned your home for a few years, and made regular payments on your mortgage, then there’s a good chance that you will have built up a significant amount of equity. The lender will use this as a basis to determine how much you can borrow.
You can calculate how much equity you have as follows:
Take the current value of your property and subtract the total amount still owed on your mortgage. This will give you an approximation of how much equity you have in your home.
You can then use this figure to find out how much a lender is willing to provide as a second charge mortgage. It’s not possible to borrow all of the equity, as you will then have total borrowing that equates to 100% of your home’s value.
These lenders will tolerate a small amount of bad credit on your credit report. This is another reason that some borrowers choose a secured loan over a full remortgage. Perhaps their financial situation has changed since arranging the current mortgage.
There’s quite a few documents needed when you apply and you will need to provide proof of your income and pass the lenders affordability checks, much like a standard mortgage.
There’s no requirement to use the same lender as your main mortgage, so your broker can source the best deal for you. For most people, the length of time it takes to get a secured loan will be 2-4 weeks.
In terms of repayments you will be making a separate monthly payment in addition to your current mortgage.
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When would you use it?
A second charge mortgage may be an appealing borrowing option if
- You don’t want to remortgage your property, or are finding it difficult to do so
- You have the equity in your property but can’t access other types of credit
- You want to borrow a large sum of money without having to take out multiple personal loans
- You have a low credit score which is making it difficult to obtain other forms of borrowing
- You need money to buy an uninhabitable property
Reasons to choose a second charge mortgage
It’s fair to point out that a second mortgage will be more expensive than a first mortgage. So approaching your existing lender will be the cheapest option but this is not always possible.
A second charge mortgage may be a good option if you have the available equity in your home and would like to access some of it without having to remortgage.
They can also help those with bad credit scores who are unable to obtain other types of borrowing, as lenders are more likely to accept applications for this type of loan. In addition, second mortgages can provide a way to borrow larger sums of money without needing to take out multiple personal loans.
Early repayment charges are applied to mortgages that are repaid earlier than agreed with the lender. Remortgaging to a new lender may incur these fees. By taking out a second charge mortgage you can avoid these early repayment fees and therefore save money.
Some things to consider before taking out a second mortgage
Taking out any form of loan can be a big decision and it’s important to make sure you understand the risks before committing. A second mortgage is still secured against your property, so defaulting on the loan could mean that you lose your home.
In terms of cost, it is advisable to see if a further advance from your current lender is available, as this may be cheaper. Then you would be able to compare a second charge vs a further advance.
It is also important to consider how long you are likely to need the money for, as interest rates can be high and you may want to think about finding a more cost-effective borrowing option for the long term.
It is also worth noting that if your circumstances change, it may not be possible to switch to a different type of loan product (Does a secured loan affect remortgaging?).
If you are considering taking out a second charge mortgage, you should speak to a second charge mortgage broker who can help you to weigh up the pros and cons. They will be able to assess your individual circumstances and advise on whether this type of loan is the best option for you.
What happens when you move home?
You will normally need to repay the loan as part of the process when you move home. Depending on how far into your mortgage term you are, this could incur early repayment charges. It is therefore important to factor in any potential costs if you are considering moving in the next few years.
If you still have a significant amount of time left on your loan, you may be able to transfer the loan to your new property. However, this is something that needs to be discussed and agreed with both lenders.
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The high street lenders can’t help every mortgage customer and they prefer the simple, low-risk ones.
If your situation is a bit different or needs a more personalised solution then our brokers can help.
Expert advice, for all situations.
Second Charge Mortgages
It’s important to get expert advice when taking out a second mortgage as there are a lot of things to consider.
Bridging Loans
The most flexible of secured loans and often misunderstood. Bridge loans can be used in so many different ways and can be arranged super fast.
Complex Mortgages
A complex mortgage could be considered any situation that does not fit with the standard lenders. Typically this would be borrowers who have multiple income streams and/or properties of non-standard construction.
Are second charge mortgages regulated?
Yes, second charge mortgages that affect your home are regulated by the Financial Conduct Authority in the same way as other forms of regulated borrowing.
This means that lenders have to meet certain standards when assessing any application and have to provide information about the costs and risks associated with taking out a loan. It is important to always read through any information provided before committing to a loan agreement.
Our article ‘Are second charge mortgages regulated?‘ covers this question in more detail.
Alternatives
A secured loan is a way to release equity without remortgaging.
It’s usually the next option where a remortgage is not possible. However, you should first consider a further advance from your existing lender. This allows you to borrow some extra money without touching the original mortgage.
If you need to borrow a small amount of money, you might be better off with a personal loan. This is quick and easy to arrange and is unsecured. This means that it is not attached to your home via a charge.
We hope that this article has helped to explain what a second charge mortgage is and how it could help you access the equity you have in your home. As with any form of borrowing, it is important to make sure that you fully understand the terms and conditions before taking out a loan. If you would like more information or advice on second charge mortgages, please speak to an independent mortgage broker. They will be able to provide tailored advice based on your individual circumstances and help you find the best borrowing option for you.
