Bad Credit Second Charge Mortgage

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ABC FinanceSecond Charge MortgageBad Credit Second Charge Mortgage
Gary Hemming

Author: Gary Hemming CeMAP CeFA CeRGI CSP

20+ years experience in second charge mortgages

A second charge mortgage with bad credit allows you to borrow money alongside your existing mortgage using the equity in your home as security.

If you’ve got a bad credit history, or even just a low credit score, we can help you to borrow the money that you need. We can raise funds for home improvements, debt consolidation or almost any other reason.

What is a bad credit second charge mortgage?

This is a secured loan for a comparatively substantial sum, using the equity in a property as collateral, that acts as a second mortgage.

Seeking funding this way ensures that you can maintain a prime mortgage interest rate while gaining access to an additional lump sum.

Now, we come to bad credit second charge mortgages. If your credit score is below the national average, you are unlikely to be approved for an unsecured loan.

You’ll also find that many high street mortgage lenders will refuse your business, as you are considered at higher risk of defaulting on your repayments.

Some lenders specialise in helping customers with bad credit and are prepared to overlook past issues if an affordability assessment suggests that repayments can be maintained.

Your previous financial problems will likely be reflected in the interest rate you are offered, which will be higher than somebody with a perfect credit score and clean history.

That said, a bad credit second mortgage can still work out much cheaper than paying high interest rates on unsecured debts.

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Why take a second charge bad credit mortgage?

There are several situations in which somebody may wish to take out a second charge mortgage.

The most common reason for second charge mortgages with bad credit is debt consolidation. If you have multiple lines of unsecured credit you’ll be making numerous payments every month, often at a high interest rate.

These loans will be harming your credit score, and you will likely be making very little headway into reducing the balances.

Consolidating through a second charge mortgage can bring the monthly payment figure down considerably – oftentimes, it will be halved or greater.

With 2nd mortgages, you’ll only have one payment to worry about each month, and your credit score will steadily improve if you are less reliant on unsecured borrowing.

A second charge mortgage could also be used for a substantial one-off purchase. This could be a new car, paying for a wedding or dream holiday, or even laying down a deposit for a second home.

If your personal circumstances have changed since you took out your residential mortgage, such as encountering financial difficulty or moving to from an employed role into self-employment, your credit score may have taken a hit, making an unsecured loan difficult.  

Of course, you may also wish to investigate remortgaging your home and borrowing more money to accommodate your financial need. This will mean repaying your current mortgage and losing a deal that may be cheaper than you now qualify for.

Taking out a second mortgage allows you to retain your existing mortgage rate, acting as an entirely separate arrangement.

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Can I get a second charge mortgage with a poor credit history?

Yes, you can get a second charge with a poor credit history.

As mentioned earlier, you are considerably likelier to be awarded a bad credit second charge mortgage than you are to obtain a more traditional loan from a high street lender.

You’ll need to prove that you can meet your financial responsibilities to have your application for a 2nd mortgage with bad credit approved. Existing issues with CCJs, defaults, bad debt, or bankruptcy will still pose roadblocks, but more mortgage options will open up to you.

A lender that specialises in second charge mortgages with bad credit will focus more on affordability than credit score, looking more to the present and future than the past.

Some caveats still apply to bad credit second charge mortgages. The amount that you can borrow will be directly linked to how much equity you have in your property. A good mortgage broker will be able to maximise your loan size.

Equity is calculated by subtracting the outstanding balance of a mortgage from the value of the home.

So, imagine that your property is valued at £225,000, and you have £100,000 remaining on your mortgage. This leaves you with equity of £125,000. A lender will set a cap on how high you can take your loan to value (LTV).

It’s worth noting that bad credit specialists are rarely available to the general public, instead working only through FCA regulated brokers.

If you are seeking a bad credit second charge mortgage, you’ll almost certainly need to work with a broker to find the best deal for you.

Contact ABC Finance to learn how we can help with your search for a 2nd mortgage. 

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What are the advantages of second charge mortgages for borrowers with bad credit?

The advantages are:

  • A bad credit second charge mortgage can offer significant relief if you are struggling with multiple unsecured debts. Every time you miss or are late with a credit card or loan repayment, your credit score will suffer further. Consolidating all your repayments into one will help you sleep better at night, knowing that you only need to cover a single monthly payment.
  • The drastic reduction in outgoing costs offered by a second charge mortgage will also leave you with more breathing space. If you took out credit cards or loans while your credit score was already less than stellar, you will likely be paying extremely high interest rates. It’s very unlikely that a second charge mortgage will command an APR above 25%, which is to be expected for many credit cards and unsecured loans marketed to customers with poor credit history.
  • Taking out a secured loan, and keeping up with your repayments, will also heal your credit score. This will not happen overnight, but paying off (and ideally closing) your unsecured accounts will bolster your score over time. Equally, secured debt does not count toward credit utilisation, so as long as you do not run up unsecured debt again, your credit report will look considerably cleaner.

What are the disadvantages of a second mortgage for borrowers with bad credit?

The disadvantages are:

The biggest disadvantage of a second charge mortgage is that it places your home at risk if you fail to keep up with repayments. If you default on an unsecured loan, your credit score will suffer but your personal assets are less likely to be at risk.

Second charge mortgages can also be expensive, even if you plan to pay the agreement off early. In addition to interest payments, your broker will charge a fee for sourcing the loan and managing the application.

This can be a percentage of the sum that you borrow, sometimes as much as 12.5%. That’s an additional £5,000 if you borrow £40,000. ABC Finance resolves this concern by limiting fees to a flat rate of £1,495.

Broker fees are not the only additional expense you’ll encounter. Your lender will charge an administrative fee to set up the loan and penalise you with an early settlement fee if you close the account before the end of the agreed term.

That’s still cheaper than letting the loan run its course, however. A second charge mortgage of £40,000, charged at an interest rate of 11.5% over 25 years, could cost almost three times once interest and fees are taken into account.

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Poor credit second charge loans with a CCJ

Yes, it is still possible to obtain a second charge mortgage with a CCJ on your credit file. It will certainly require an explanation and may influence how much you can borrow.

If you have a CCJ on your credit file, whether active or lapsed, do not try to hide it.

Be honest with a lender about how this CCJ arose, and why you are confident it will not be repeated. Of course, a CCJ can also lead to a higher interest rate on your second charge mortgage.

Keep reading – Fixed rate second charge mortgages

How to apply for a second mortgage on your home with bad credit

If you’re interested in a bad credit second charge mortgage, you’ll need the services of a broker like ABC Finance.

Our friendly and experienced team are always available to discuss your options and explain how we can help you leave the past behind and build toward a better future.

If you think that a bad credit second charge mortgage would benefit you, get in touch and let us know the following information and we’ll help.

  • How much money you are looking to borrow.
  • A list of outstanding debts, if applicable.
  • The value of your property, and the outstanding balance remaining on the mortgage.
  • A list of your monthly financial commitments.

Armed with this information, alongside a copy of your credit file, a broker will be able to identify potential lenders that will consider working with you.

If successful, the broker will arrange an agreement in principle and you will be asked to provide documents that offer proof of your identity, address, and earnings. From here, you can proceed with your application.

Things to consider before applying for a bad credit second mortgage

If you are considering a second charge mortgage, here are the things you need to factor into your decision.

  • Can you take steps to improve your credit score before applying, potentially securing a better interest rate?
  • Can you realistically keep up with the repayments?
  • Will a second charge mortgage improve your financial position in the medium – and long-term, not just offer immediate relief before familiar problems arise?
  • Are you fully aware of the fees involved in the process, understanding that you will pay back more than you borrow if you allow the loan to run to term?
  • Are you prepared to pay an early exit penalty if your circumstances change, and you find yourself in a position to repay the loan early?

If you answered yes to all of these questions, contact ABC Finance today and learn how we can help you find the ideal bad credit second charge mortgage for your needs.

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