Second charge mortgages allow homeowners to borrow against the equity held in their property. A second charge mortgage allows you to borrow larger amounts, at lower interest rates and over longer terms than personal loans.
Second mortgages run alongside our existing mortgage deal on the same property and allow you to release equity.
What we cover in this article:
- What is a second charge mortgage?
- Why should you get a second mortgage?
- What can a second charge mortgage be used for?
- Who could benefit from a second charge mortgage?
- What is the second charge mortgage process?
- What are the latest second charge mortgage rates?
- What are the advantages of 2nd charge mortgages?
- What are the disadvantages of 2nd charge mortgages?
- What should I consider before taking out a second mortgage?
- How long does it take to get a second charge mortgage?
What is a second charge mortgage?
A second charge mortgage is a form of secured loan, which is taken out against your property.
Instead of remortgaging, which involves taking out a new mortgage, a 2nd charge mortgage is an additional loan secured against your property with a second lender.
Do I need my mortgage lender’s permission to take out a second mortgage?
Yes, you will need your mortgage lenders permission to take out a second mortgage. This is because second mortgages are secured against your existing property and will sit behind your current mortgage.
If your mortgage company feels that you will not be able to keep up with repayments and, thus, are placing their asset at risk of repossession by your second mortgage lender, they will refuse to grant consent to a second charge.
In some cases, you may be able to take out a second charge mortgage using an equitable charge without your mortgage lenders permission, although this is rare.
The biggest factors in consent is having sufficient equity in your home or buy to let property (whichever you’re securing against), your financial circumstances and your original mortgage provider.
Why should you get a second mortgage?
If you’re wondering why second charge mortgages are preferable to remortgaging with your existing lender, here are some examples of situations that make them a popular choice.
- If you have a low rate on your current mortgage, a second mortgage allows you to borrow more money without losing your current mortgage deal. This can lead to you paying less for a second mortgage than you would when refinancing your outstanding mortgage.
- Your current first charge mortgage deal comes with a high fee for refinancing, usually in the form of early repayment fees.
- If you have had some financial difficulties since taking out your first mortgage, your credit score may have dropped and remortgaging becomes challenging – or more expensive.
- You have changed from salaried employment to self-employment with variable monthly income. Second charge mortgages, are easier to obtain in these circumstances and allow you to keep the low interest rate on your mortgage.
- Consolidating debt such as unsecured borrowing, unsecured personal loans, credit cards and overdrafts may be cheaper using a this type of mortgage.
What can a second charge mortgage be used for?
As with any secured loans, second charge mortgages can be used for most significant and unexpected expenses that can occur in your daily life. Common reasons for people to take out second charge mortgages include:
- Home improvements or structural repairs
- Paying a deposit for a second property or buying outright at auction (and funds towards home improvements for the property)
- Major one-off expenses, such as a new car, holiday, or wedding
- Debt consolidation to reduce monthly outgoings on a personal loan or loan secured on property.
- Expenses related to starting a new business
Watch our second charge mortgage video
Who could benefit from a second charge mortgage?
Any homeowner who is looking to raise finance can benefit from second charge mortgages (also known as secured loans). Of course, the relative benefit of will depend on your current mortgage deal, how much you would like to borrow and your personal circumstances.
Will I qualify for a second charge mortgage?
You will theoretically qualify for if you own a property with at least 15% equity and have a reasonable credit rating. How much equity you have and your original mortgage are key factors.
All lenders have their own views on what constitutes responsible borrowing, so nothing is set in stone. It’s always best to talk to a second charge mortgage broker, as a professional will pair you with the right lender for your circumstances and make sure you’re borrowing money responsibly.
How much can I borrow on a second charge mortgage?
The maximum you will be able to borrow on a second charge mortgage is 90% of your property value, minus your existing mortgage.
How much equity and how much existing debt secured there is are the key factors to consider.
The minimum and maximum loan sizes are from £10,000 to £2,000,000.
This is far more than is possible using personal finance products such unsecured borrowing.
What is the second charge mortgage process?
The first step is enlisting the services of an experienced second charge mortgage broker.
This way, you can gain vital insights into whether a second mortgage is the best way to raise money or if an alternative product would be more appropriate.
A second mortgage broker can also access the best deals on the market, and identify the ideal second charge mortgage lender for you.
If an adviser confirms they have found the perfect lender, approach your existing mortgage provider and ask permission to take out a second charge mortgage. If they agree, you’re able to get moving.
Your broker will then retake the reigns, arranging the second mortgage with your new lender.
You will have to fill in paperwork, sign contracts, and provide any required documents. The second charge mortgage lender will also arrange for an independent valuation of your home.
Once complete, the money will be transferred to your account, and you can enjoy it – though the new mortgage repayments will typically commence within one calendar month.
What are the latest second charge mortgage rates?
Second charge mortgage rates vary wildly. They could be as low as 2% or as high as 20%. Many factors will influence the interest rate you are offered, including:
- How much money you are looking to borrow, and the loan-to-value required. You will likely receive a better interest rate asking for 40% of your property value than 70%.
- The length of the repayment term. The longer the term, the lower the monthly payments, but the higher the overall cost of the loan, but the lower the monthly payments.
- Your personal or professional credit rating and financial situation. A poor credit score will result in higher interest rates, as you are considered a higher-risk borrower.
- Your first mortgage provider and level of current mortgage payments can also affect the product offered.
At the time of writing, second charge rates of 7% or below are considered a competitive interest rate. Seek a brokers expertise to ensure you receive the best rate possible and avoid paying more interest than necessary.
Are there any other fees to consider?
The interest you’ll pay on your loan is not the only cost to consider. Other expenses that need to be accounted for are the following:
- Broker fees – second charge mortgage brokers often charge fees up to 12.5%! We charge a low, fixed £1,495 broker fee.
- A lender fee to cover the administration of setting up the loan and releasing the funds
- Any costs incurred during the valuation of your home – a second mortgage lender will need to conduct their own appraisal before agreeing to release money
- An early exit fee (known as early repayment charges) if you wish to pay off the second charge mortgage before the end of the term
Why are second mortgage rates more expensive than 1st charge mortgages?
Second charge mortgages come with a higher interest rate than those on a first mortgage as they’re a little riskier for lenders.
If you were unable to keep up your monthly repayments, and your property was repossessed, the first charge lender would be repaid first.
The second charge lender would then be repaid, and would face financial loss if their funds weren’t available (even though they have a mortgage secured).
What are the advantages of second charge mortgages?
To summarise the core benefits of second charge mortgages:
- It’s a much more affordable lending option as a secured loan than remortgaging with an existing lender if you’ve locked in a low rate with low mortgage repayments.
- You can get your hands on a large cash sum comparatively quickly without having to pay early repayment charges
- They’re easier to obtain than personal loans, especially if you are self-employed or have a questionable credit history
- You will not need to enlist the services of a solicitor or pay any upfront fees for surveys before the loan is agreed
What are the disadvantages of second charge mortgages?
Of course, for every benefit of second charge mortgages, there is also a potential drawback. Things to take under advisement before seeking out such an agreement include:
- You may pay a higher interest rate than a traditional mortgage.
- If you cannot keep up with monthly repayments, you will be placing your home at risk. You’re going to need to be highly disciplined with your finances, especially if you’re taking out a second charge mortgage for debt consolidation
- They aren’t suitable where you have property owned outright
- You’ll be starting a whole new repayment schedule, so you’ll potentially still be on the hook to creditors beyond the conclusion of your mortgage term
- If you choose to move home or sell your property, you’ll potentially be looking at early exit fees from two mortgages
- A further advance may have lower interest rates
What should I consider before taking out a second mortgage?
If you’re thinking about second charge mortgages, there are a handful of questions to ask yourself before committing.
Sit down and contemplate the following queries, potentially talking them over with a second mortgage advisor.
- Can you afford to keep up the repayments on two mortgages without overstretching yourself?
- Are you planning on staying in your current home for the foreseeable future? A second charge mortgage may become a false economy if you want to move and need to repay the loan early
- Are there other ways to get your hands on a cash injection to cover your expenses without tying yourself into a longer repayment term?
How long does it take to get a second charge mortgage?
Second charge mortgages usually take two to four weeks to complete. This is made up of the time taken to process the application, assess second charge mortgage affordability, value your property and get consent from your existing mortgage lender.
Sometimes, the process is much faster. Some second charge lenders claim they can get the requested funds to a client within a matter of days.
However, it’s always advisable to set aside at least a month for the process to complete.
Here are some of the most common questions we are asked about second charge mortgages.
Is a second mortgage good for my credit score?
When you request a second charge mortgage, a second charge lender needs to conduct a hard search on your credit file.
This will immediately reduce your credit score by a handful of points. However, keep up your repayments on time, and your score will build as it shows that you are a trustworthy and reliable borrower.
Can my mortgage lender prevent me from taking out a second charge?
Yes, you will always need permission from your first charge mortgage lender before taking out a second charge mortgage elsewhere. If your mortgage lender has any reason to believe you will struggle to meet the repayments required on this secured loan, they will block the process.
How do you repay a second mortgage?
A second charge mortgage will be repaid like any other mortgage or secured loan. A set monthly repayment will be agreed upon and taken from your bank by direct debit once a month.
Capital repayment loans have payments made up of both capital and interest. Making the repayments on time will see your second charge mortgage be repaid in full at the end of the term. Interest only 2 charge loan payments are, as the name implies, only interest.
This means that the capital will remain outstanding in full. As such, the full loan balance will remain outstanding in full and is generally repaid in a lump sum at the end of the loan term.
Will I have to pay my mortgage early repayment charge?
No, your early repayment charge is if you repay your current first mortgage balance.
Can I get a second mortgage if I own my property outright?
No, in this situation, a remortgage would be most suitable.
Who regulates this market?
The market is regulated by the Financial Conduct Authority (FCA).