Fixed rate second charge mortgages allow you to borrow money, securing the funds against the equity in your property. Fixed rate products give you certainty that your payments won’t increase, should the Bank of England Base Rate, or lender variable rates increase.
In this guide, we break down how a fixed rate second charge mortgage works, the alternatives to fixed rate second mortgages and some key tips on how you can get the best deal.
What we cover in this article:
- What is a second charge mortgage?
- What is a fixed rate?
- What are the alternatives to fixed rates?
- What are the advantages of fixed rate second charge mortgages?
- What are the disadvantages of fixed rate second charge mortgages?
- Will I qualify for a fixed rate second charge mortgage?
- Can I still get a second charge mortgage with a fixed rate if I have bad credit?
- How do I get the best deal on a fixed-rate second charge loan?
- Can I repay a fixed rate second charge mortgage early?
What is a second charge mortgage?
A second charge mortgage is a type of loan that uses the equity held in a property as collateral for the debt. Using a property as security for the loan allows you to borrow higher loan amounts, at lower interest rates and over a lower term than would be possible using an unsecured loan.
Second charge mortgages are often used by homeowners to raise funds for home improvements, debt consolidation, to fund large one-off expenses and to inject capital into a business.
What is a fixed rate?
A fixed rate is an interest rate that stays at a set level for an agreed period of time, often between 2-5 years. Fixed rates give borrowers the security of knowing that their payments will remain the same for the duration of the fixed rate period.
This can make budgeting far simpler and offer some protection against increasing costs, such as the cost of living crisis.
What are the alternatives to fixed rates?
The alternatives to fixed rates are the various types of interest that can increase or decrease or time. Collectively, these are known as variable rates.
There are several types of variable interest rate. They are:
- Standard variable rates – Also known as SVR, these rates are set by each lender and can be changed at any time at the sole discretion of the lender.
- Tracker rates – Tracker rates track the Bank of England Base Rate and increase or decrease in line with it. Tracker rates are usually set at a certain margin above the Bank of England Base Rate, for example, Base Rate +3%.
- Discounted variable rates – Discounted rates are much like standard variable rate mortgages, but with a discount applied for a set period. Discounted rates are by their very nature, usually offered at a lower interest rate than SVR mortgages.
What are the advantages of fixed rate second charge mortgages?
The advantages of fixed rate second charge mortgages are:
- Simple budgeting – Your repayments stay the same for the duration of the fixed rate period.
- Affordable – fixed rate loans are more likely to remain affordable, even if rates rise.
- You choose the fixed period – There are lots of fixed rate products, meaning you can choose a fixed term to suit you, from the options available.
- More relaxed affordability rules – In some cases, you may be able to borrow more on a long term fixed rate loan than would be possible using a variable rate product.
- Flexible security – They can be taken against your main residence or an investment property. This is known as a buy to let second charge mortgage.
What are the disadvantages of fixed rate second charge mortgages?
The disadvantages of fixed rate second charge mortgages are:
- Early repayment charges – Most fixed rate loans come with early repayment charges, also known as penalties, should you choose to repay, or make significant overpayments to the loan during the fixed rate period.
- Interest rate falls – Should interest rates fall, you won’t benefit at all and will be tied into your higher fixed interest rate.
- May have higher rates – Fixed rate products usually come with a slightly higher rate than equivalent tracker rate loan products.
- May have higher fees – Fixed rates may come with slightly higher set-up fees, usually in the form of a higher lender arrangement fee.
Will I qualify for a fixed rate second charge mortgage?
If you qualify for a second charge mortgage, then you’ll almost certainly qualify for a fixed rate product. Most second charge mortgage lenders offer a wide range of fixed-rate options which are open to all borrowers.
Can I still get a second charge mortgage with a fixed rate if I have bad credit?
Yes, you can still get a fixed rate 2nd charge mortgage even if you have bad credit. The rate charged may be slightly higher than those available to borrowers with a perfect credit history, but there will still be fixed options available.
We work with a range of lenders who specialise in bad credit second charge mortgages, many of whom have strong fixed-rate product ranges.
How do I get the best deal on a fixed-rate second charge loan?
To get the best deal on a fixed rate 2nd charge mortgage, you should do the following:
- Check your credit score – Check your credit rating to make sure there are no nasty surprises when the lender undertakes a credit check. If there are any errors or issues, clear them up before applying where possible.
- Compare from a broad range of lenders – Compare deals from a range of lenders, either by approaching them directly, or through a reputable second charge mortgage broker, such as ourselves.
- Don’t pay high broker fees – Broker fees can significantly add to the cost of a loan. Many brokers charge a fee of 12.5% of the loan (£5,000 on a £40,000 loan), whereas, at ABC Finance, we charge a low, fixed £1,495 broker fee when the loan completes with no upfront application fees.
Can I repay a fixed rate second charge mortgage early?
Yes, you can repay a fixed rate second charge mortgage early, but you may be hit with early repayment charges (ERCs). If you think you may repay the loan early, check these fees before applying as it could lead to big savings later on when the time comes to repay the loan.