When borrowing money against your house it’s important to understand the various options available.
A further advance and a second charge mortgage are both types of secured loans that can be taken out by homeowners who already have a mortgage on their property, but they have key differences.
In this second charge vs further advance guide, we will explore the pros and cons of each option, the difference between the two, and how to qualify. Whether you’re looking to make home improvements, consolidate debt, or fund a major purchase, we will provide you with the information you need.
What are second charges?
A second charge mortgage is a type of secured loan that homeowners who still have a mortgage can take out using the equity in their property as security. It can provide a way for you to raise funds for various purposes, including home improvements, but means that you’ll effectively have two mortgages to pay at the same time. A second charge mortgage will come from a different lender to the one that you have now.
Second charge mortgages are also sometimes referred to as a homeowner loan or secured loan. The different names can sometimes lead to confusion, as a second mortgage might also be used when obtaining another mortgage to purchase a second property.
How much can you borrow?
The amount you can borrow will depend on the value of the equity you own in your home – this is the overall value of your property minus your outstanding mortgage balance – and how much a lender decides is affordable for you to pay back. This means your wider financial circumstances, income and credit score are important too.
The actual amount you can borrow will differ between lenders but loans are widely available from £10,000 to £500,000.
What are the disadvantages of a second mortgage?
These may include:
- You will likely face higher interest rates on your second charge mortgage than on your first mortgage.
- You will be responsible for paying two mortgages at the same time.
- If you fail to keep up with the repayments on either your initial mortgage or your second mortgage, you risk losing your home.
- If you fall into financial difficulties and the sale of your home doesn’t cover both your original and second mortgages, second charge lenders may pursue you for the unpaid amount.
- If you decide to sell your home, you will have to clear both mortgages, which can limit the deposit for your new property – unless your lender agrees to transfer your second mortgage to your new home.
- Second mortgages can come with early repayment charges and other fees.
- You will need permission from your existing mortgage lender before obtaining a second mortgage. (or find a lender that accepts equitable charges).
Why take one out?
Often second charges are taken out because a remortgage and/or further advance is not possible.
This may be due to expensive exit fees, or perhaps the remortgage criteria is too restrictive. These lenders can be a bit more accepting of some bad credit or a need to stretch your income multiples. However, they are a more expensive way of borrowing money.
What can they be used for?
- Debt consolidation
- Home improvements
- Wedding or honeymoon
- School fees
- Lease extension
- Property investment
- New car
- Tax bill …
When is a second mortgage not a good idea?
Whether or not taking out a second mortgage is a good idea depends on your personal circumstances and the credit options available for the amount of money you need to borrow.
Second mortgages can be beneficial for homeowners who need to borrow large sums that are not available through other unsecured means or mortgages, or they may offer a lower interest rate than other options. They can also be arranged in around 2-4 weeks. However, it’s important to weigh the potential risks and benefits, and consult with a mortgage advisor to evaluate your options and make the best decision for your specific situation.
That said, taking a second mortgage out when there are cheaper alternatives available is not a good idea. The loan also eats into your home equity, so always borrow responsibly and consider whether it is necessary.
Are they a bad way to borrow money?
These types of loans don’t have the best reputation. But they are not necessarily a bad way to borrow.
If you’re already struggling to keep up with the repayments on your first mortgage, taking out a second mortgage may not be a good idea. If you believe that your finances will become too stretched in having to make repayments on a second mortgage in addition to your first, it’s likely not the best option for you.
Consulting with a mortgage broker is a wise way to understand your options and see the different types on offer.
What is a further advance?
A further advance is when you borrow more money from your current lender, think of it as a mortgage ‘top-up’.
You will stick with the same lender and your main mortgage will be unaffected. The money you borrow under the further advance will be arranged as ‘mortgage No. 2’ and will have a different interest rate. You will need to have built up enough equity to borrow against.
You may even end up making two separate payments each month.
Having a further advance can make remortgaging in the future a bit tricky. With the further advance you will be able to choose a fixed or variable interest rate deal. This is unlikely to end at the same time as the main loan.
As they are out of sync it can make remortgaging difficult where there are early repayment charges in place. This is something to discuss with your mortgage adviser, with the idea of getting them to finish as close together as possible.
When would you need one?
Borrowing from your current lender will often be the cheapest route to raising some capital, providing that you have maintained your mortgage account to a high standard and have a good credit report.
A further advance can make sense when you are unable to remortgage or switch lenders.
Your repayments can be spread over a long term and the rate should be competitive, and cheaper than an unsecured personal loan.
It’s also relatively quick to arrange as your lender already holds a charge of your property.
Is it the same as a second charge?
No. A further advance is taking out an extra mortgage with your existing mortgage lender.
A second charge is taking out an extra mortgage with a new lender, in addition to the mortgage you have now. Hence the term ‘second charge mortgage‘.
What can a further advance be used for?
They are a popular way to fund large home improvements, such as an extension, new kitchen or conservatory.
Depending on your lender, they may also be used to buy a new car, debt consolidation or to raise a deposit for another property purchase.
Do you need a solicitor?
This shouldn’t be necessary. The mortgage application is effectively kept in-house, and you are staying with the same lender, not moving, and the lender already has a legal charge on your home.
CONTACT A MORTGAGE BROKER
If you are ready to take the next step then we can put you in touch with a fully qualified independent mortgage broker.
What’s the difference between further advance and a second charge mortgage?
A further advance and a second charge mortgage are both types of loans that you can take out if you already have a mortgage on your property.
However, there are some key differences between the two:
- A further advance is a loan that you can take out from the same lender that provided your original mortgage. It’s essentially an additional loan that is added to your existing mortgage.
- A second charge mortgage, on the other hand, is a separate loan that you can take out from a different lender. It is secured against the value of your property, just like a first charge mortgage, but it is ranked behind your first mortgage in terms of priority in the event of repossession.
The main difference between the two is that with a further advance, you are dealing with the same lender as your original mortgage and may get a better interest rate. On the other hand, with a second charge mortgage, you are dealing with a different lender and might have to pay a higher interest rate but they might be easier to deal with.
Which is better?
Whether a further advance or a second charge mortgage is better for you depends on your specific circumstances and financial needs.
A further advance can be a good option if you’re looking to borrow a smaller amount of money and you’re comfortable dealing with the same lender as your original mortgage. The interest rate may be lower than what you would get with a second charge mortgage, and it can also be a faster and simpler process as you are already dealing with a lender you have an existing relationship with.
On the other hand, a second charge mortgage can be a good option if you’re looking to borrow a larger amount of money or if you’re looking for more favourable lending terms than your current lender can provide.
Is remortgaging the same as releasing equity?
Remortgaging your home is the process of moving your mortgage from one lender, to another. But without moving home. Releasing equity generally means accessing your home’s equity via a mortgage or loan. But do you have to do both of these things together? and is remortgaging the same as releasing equity? Let’s find out…
Would a remortgage be better?
Remortgaging would mean moving your mortgage over to a new lender and borrowing the extra money you need at the same time. You will simply apply for a larger mortgage.
Whether this would be better is hard to say. There’s quite a few calculations needed.
It might be a good option if you have no, or very low, early repayment fees for paying off your mortgage. When working with a mortgage broker this is a comparison that they would always want to do, just to check either way.
In looking to switch lenders, you will need to consider whether remortgaging with bad credit is possible. While there are many bad credit mortgage companies, they charge more than a normal lender would.
You might be better of remortgaging instead of taking out a secured loan, as these will be at higher rates. Again, this will depend on your exit fees.
You can learn more about remortgaging in our remortgage guide.
Should you use a broker?
Yes, definitely, absolutely! 😉
A mortgage broker will be able to offer you three main advantages:
CHOICE
The only way to get access to hundreds of different lenders is to work with a broker. They can deal with all of the big lenders such as Nationwide, Virgin, TSB, Barclays etc but they will also have connections to many more smaller and specialist lenders.
Some of these only work with mortgage brokers and intermediaries.
COMPARISONS
Checking whether a further advance is cheaper than a remortgage or secured loan is not for the faint hearted. It takes many calculations and a deep understanding of how products and lenders work.
Your broker will be able to do all of these for you.
HELP & ADVICE
A mortgage broker deals with mortgages all day long. They will most likely have helped other clients in a similar situation to you and can quickly recognise the best path to take. They will advise you on which loan type to take, and from which lender, and explain why.
Then they can help with the forms and the admin.
