Certain types of borrowing require security before they can be approved. This reduces the risk to the lender as they can sell the security if you stop making the repayments.
A mortgage is a loan that is associated with a particular property that it is ‘secured on’. And this security is provided by registering a ‘charge’ at Land Registry, which is done by a solicitor or conveyancer. This is formal proof of the debt and it stops the property being sold without the lenders consent.
When we talk about a second charge against a property this means that there is another mortgage loan, in addition to the first, and that lender also needs the extra security of a legal charge against the asset.
What is a legal charge on a property?
A legal charge is a form of security that allows a lender to secure their interest in a property. In essence, it gives the lender rights over the property and this can be used to repossess it in the event that the borrower fails to repay their loan or mortgage. A legal charge will typically be registered with HM Land Registry as evidence of the lender’s security. This gives them a recourse to take action against the borrower if need be, as well as ensuring that any other creditors who may have an interest in the property are aware of their rights. It is important to note that a legal charge on a property is different from a mortgage, and can also apply to other types of loans and debts.
A legal charge will usually remain in place until the loan or debt has been repaid in full. In some cases, lenders may also require additional security such as a personal guarantee or other assets. It is important to note that it is the responsibility of the borrower to make sure that they are aware of any legal charges on their property and to ensure that these are adhered to.
What is a second legal charge on a property?
A second legal charge is used by lenders to secure additional debts or loans taken out against a property.
It is similar to a first legal charge in that it provides the lender with rights over the property and can be used to repossess the property if needed. However, unlike a first legal charge, it does not have priority over the original lender.
This means that in the event of a repossession, there’s a chance that the second legal charge may not be fully repaid.
If you are considering taking out a loan or other form of debt against your property it is important to make sure that you understand any additional legal charges or security requirements before making a decision.
It is also important to make sure that you understand the implications of a second legal charge, and the potential consequences if you are unable to keep up with repayments.
What does a second charge on a property mean?
A second charge on a property means that there are two or more creditors (lenders) who have an interest in the property.
A first legal charge is typically the original loan or mortgage taken out by the borrower, but a second charge mortgage, homeowner loans and debts can subsequently be secured via a second legal charge, depending on the amount of available equity.
This type of security may be required if the borrower has a poor credit history or if the lender wishes to take extra security against a loan.
In the event of repossession, any second charges on the property must be paid out after the first charge is repaid. This means that it is possible for a borrower to lose their equity in the property due to an inability to keep up with repayments on a second loan or debt.
Equitable charge loans
Occasionally, it is not possible for the second lender to register their charge. Often this is because your main mortgage lender did not give their permission. Instead, some lenders can offer an equitable charge loan, where security for the loan is taken via an ‘equitable charge’ over your property.
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What is a second charge mortgage?
A second charge mortgage is a form of secured loan that is secured against the equity in your property.
This type of loan can be used to finance home improvements, debt consolidation, or other large purchases. Like any other form of borrowing, it should only be undertaken with careful consideration and understanding of the terms and conditions of the loan. It is important to note that any second charge mortgage will be in addition to an existing first mortgage and the lender may require the borrower to provide additional security or a personal guarantee.
Why do people take out second charge mortgages?
Second-charge mortgages are often taken out by people who have a lower credit score, poor credit history or limited access to other forms of finance.
But also, it is a way of releasing equity without remortgaging. This can be useful where there are large early repayment charges.
Because the debt is linked to a property the lenders are willing to accept a little more risk, although you will find that the interest rates are dearer than an equivalent ‘first charge’.
What can you use a second charge mortgage for? They can be used to fund larger purchases such as home improvements, debt consolidation or other major expenses. Additionally, they can provide an alternative to remortgaging especially when the borrower has a short-term need for finance and a low-interest rate is not necessary.
Before applying for a secured loan you should have checked out the alternatives, one of those is a further advance. A further advance is a second loan provided by your current mortgage company, in addition to the main mortgage. These are often the most cost effective ways of borrowing more but you need to meet the lenders criteria and have a good credit profile. We looked at second charges vs further advances in a separate article, which you may find interesting.
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The high street lenders can’t help every mortgage customer and they prefer the simple, low-risk ones.
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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.
How can you get a charge on a property removed?
If you have a second charge on your property, it can be removed when the borrower pays off the outstanding loan or debt. This could also involve refinancing, remortgaging or selling the property to repay the lender. Depending on the terms of the loan, it may also be possible to negotiate with the creditor in order to reach an amicable agreement.
Having a secured loan will affect your remortgage options as not all first charge lenders will want other charges in place.
Another option is to get the charge removed through a deed of release, or by making an application to the Land Registry. This involves a request to the lender to sign a deed of discharge which would remove the second charge from your property. The lender is only likely to agree to this where you have either fully or substantially cleared the amount owed.
What happens if you move home?
Any mortgage or loan attached to a property needs to be considered before the property can be sold.
Where you are moving home it is normal for the solicitors to pay off the current mortgage/s with the sale proceeds and then purchase the new property with a new mortgage. Each mortgage is legally secured against a specific property, or properties.
This means that the second loan or debt must be paid off before the conveyance process can be completed. If this is not possible, there are alternatives available such as refinancing or remortgaging the second charge or transferring it to the new property. However, this is likely to involve additional costs and should be discussed with the lender before making any final decisions.
Are second charges regulated?
Yes, second charges are regulated by the Financial Conduct Authority (FCA) in the UK where they affect your own home.
The FCA’s rules and regulations require lenders to carry out affordability checks on borrowers before they can provide a second charge mortgage, as well as ensuring that any loans or debts secured against your property are not excessive when compared to your income. For this reason they will need to see quite a few documents. Additionally, all lenders must provide clear information about the terms and conditions of the loan before it is agreed. This helps to protect borrowers from taking on more debt than they can afford.
To help you choose a lender and compare products we would suggest contacting an independent mortgage broker. They will have access to many different lenders and will be able to explain the process and talk you through the costs.
