Second Charge Mortgage Affordability

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ABC FinanceSecond Charge MortgageSecond Charge Mortgage Affordability
Gary Hemming

Author: Gary Hemming CeMAP CeFA CeRGI CSP

20+ years experience in second charge mortgages

If you are applying for a second charge mortgage, affordability will be the most significant factor in whether you are successful. You will need to prove to the lender that you can make monthly repayments on time each month.

This guide will discuss the nuances of second charge mortgage affordability and how you can handle any concerns your lender may hold.

Can I afford to get a second charge mortgage?

Only you can answer this question honestly. You will need to assess your financial commitments and confirm if you have enough flexibility to take on the burden of a second charge mortgage.

This will not be a short-term commitment, so do not just review your present circumstances. Ask yourself the following questions, and consider if they will play a role in second charge mortgage affordability.

  • When you have met all your monthly financial obligations, do you have a comfortable sum of money left over? Ask yourself how you will react if your boiler breaks down or your car needs a lot of expensive work at its next MOT – would you be able to pay these bills without concern?
  • Do you expect your financial situation to remain the same, improve, or decline in the coming years? Is your income secure, and are you still several years from retirement or another significant change to your circumstances?
  • Are you expecting any significant financial obligations to become apparent in the near- to medium-term future that could impact your ability to make the repayments on a second charge mortgage and remain comfortable?
  • Do you have savings that you can draw on if you experience a short-term cash flow issue, ensuring that you do not miss any repayments?

If you are confident that you can clear these hurdles, investigate a second charge mortgage affordability calculator online. These tools are not an exact science as you will not be aware of what interest rate and additional fees you will accrue until you start making serious inquiries, but they will help you steel yourself for the costs you may be looking at accruing.

If you are looking for a second charge mortgage as it will create an opportunity for one-off expenditure that would otherwise be out of your reach, or you are looking to save money and thus improve your affordability standing, your application is more likely to be successful than if its needed to simply make ends meet.

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How is second charge mortgage affordability calculated?

Second charge mortgage affordability is calculated by assessing your existing financial commitments and adding the sum of the second charge mortgage repayments.

These repayments will not just be the loan itself. Interest will be added to the sum, so you need to ensure that this will not tip your affordability over the edge. You will also accrue administrative expenses, such as a valuation of your property, which will be added to the total repayable.

Many lenders will also levy a set-up fee, payable as part of the loan, and if you enlist the services of a second charge mortgage broker, they will also need to be paid. Thankfully there is no need to enlist the services of a solicitor or conveyancer during a second charge mortgage application, so these professional fees do not need to be factored into your second charge affordability calculations.

How do I prove affordability to a second charge mortgage lender?

To prove affordability for a second charge mortgage, you must provide details of your income and expenditure to your new lender.

Most lenders will ask to see at least three months of payslips to confirm that your monthly earnings match your claims. If you are self-employed, you will be asked for your last two or three SA302 tax returns for the same reason.

You will also need to provide at least three months of bank statements to the lender. This will allow your lender to gain an understanding of your cash flow and account management.

Your lender will want proof that you can meet all your financial obligations every month and still have enough left over to comfortably make the repayments on the loan you are asking for. Review how much you are likely to be repaying each month, and ensure that this sum – and more besides – remains in your bank at the end of every month.

One possible exception is if you are applying for a second charge mortgage to consolidate multiple lines of unsecured debt, as this charge will theoretically replace – and reduce – many of your monthly outgoings. Some lenders will only grant the second charge mortgage in the form the repaying these debts and closing the accounts on your behalf, rather than transferring the funds.

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How much do second charge mortgages cost?

When assessing second charge mortgage affordability, the interest rate you are offered will play a major role in how much you will end up paying. Interest rates on second charge mortgages vary according to your financial circumstances, current market rates, and the lender’s policies.

The interest rate you are offered could be as low as 3.5% or as high as 17% – or, more likely, anywhere in between. To ensure you get the best deal possible, and to protect your second charge mortgage affordability, it’s advisable to team up with a mortgage broker to find the best offer open to you.

Using a broker will mean you accrue additional charges if your application is successful, as they charge a broker fee for their services. Sometimes, this fee will be as high as 12.5% of the total loan amount, so factor this into your second charge mortgage affordability calculations.

Alternatively, set your mind at rest by contacting ABC Finance and enlisting us to act on your behalf during your second charge mortgage application. Unlike other brokers, we do not charge high fees for our services. Instead, we offer our experience and expertise at a flat rate of £1,495 no matter how much you borrow.

How much can I borrow?

This depends upon your financial situation and the loan to value (LTV) ratio required.

Let’s start by discussing your personal finances. For obvious reasons, and as we have discussed throughout this guide, no lender will allow you to borrow more money than they believe you can afford to repay. While not the end-all, be-all of your second charge mortgage affordability assessment, your credit score will also play a part in how much a lender is comfortable lending you.

Once this hurdle has been cleared, you will need to assess how much equity you have available.

You need to assess what LTV the second charge mortgage lender is willing to provide. Some lenders will offer an LTV ratio of up to 90% on a second charge mortgage for a residential property.

Read more – Second charge mortgage LTV

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How is second charge affordability impacted by the mortgage term?

On paper, second charge mortgage affordability is easier if you take out a longer repayment term. If you are aged under 40 years old, you will likely be invited to repay your second charge mortgage over 30 years. If you are older than 40, this term will take you beyond retirement age, so the repayment term will be shorter.

The longer a second charge mortgage term lasts, the less you will pay each month. If you were to borrow £50,000 over 25 years at an interest rate of 7.5%, you would repay just over £360 per month. Reduce this repayment term to 10 years, borrowing the same sum at an identical interest rate, and you’ll need to repay closer to £600 per month.

Just keep in mind that second charge mortgage affordability should be balanced by the overall cost of the loan. The longer you repay the loan, the more interest you will be charged overall. The 25-year term we discussed above would cost almost £60,000 in interest. Borrowing the same amount over 10 years will reduce your total interest to just over £20,000.

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