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Second Charge Mortgage LTV

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Author: Gary Hemming CeMAP CeFA CeRGI CSP
20+ years experience in second charge mortgages

If you’re looking for a second charge mortgage, the loan to value ratio – typically known as LTV – will impact how much you can borrow. This guide will discuss the nuances of second charge mortgage LTV and how you can ensure you receive the best deal open to your circumstances.

What is a second charge mortgage?

A second charge mortgage is a secured loan, guaranteed against a property you own. Most people use a residential property to take out a second charge mortgage, but they can also be secured against buy to let properties, HMOs that you own, or a commercial property where you do business.

A second charge mortgage is not a remortgage. A remortgage involves taking out a new agreement on a property to replace your existing mortgage.

As the name suggests, a second charge mortgage involves taking out a second loan that runs alongside your existing mortgage. However, this will need to be taken out with a different mortgage provider than your current agreement. A second charge mortgage is closer in spirit to a secured loan.

You could use a second charge mortgage for a number of reasons. The most common reasons for such an application are:

  • Making improvements or extensions to a home.
  • Consolidating multiple unsecured debts into one regular payment.
  • Purchasing a second property – the second charge mortgage could be used to buy the property at auction or finance a deposit.
  • One-off purchases that are otherwise beyond your financial reach.

If you wish to take out a second charge mortgage, you will need the permission of your existing mortgage lender. By placing their asset on the line as collateral for a new line of credit, you are putting their collateral at risk. If your mortgage lender refuses to approve your application, you will not be able to go any further.

What is loan to value (LTV)?

LTV stands for loan to value. LTV is a ratio that lenders use to assess risk when offering a substantial loan to a borrower, such as a second charge mortgage. The higher the LTV ratio on a property, the higher the risk to the lender.

Mortgage lenders tend to balance the risks of LTV with a deposit. For example, if you have access to a deposit of 15% of a property’s value, the LTV of the loan will be 85%. If you’re looking to take out a mortgage at £200,000 under these conditions, you’d need to lay down £35,000 and borrow the remaining £165,000.

You will not need a deposit if you apply for a second charge mortgage. However, the LTV will determine much you will be able to borrow. The risk of this loan still needs to be weighed up by the lender before they approve or decline your application.

What LTV can I get on a second charge mortgage?

Second charge mortgage LTV could be anywhere from 60% to 95% – it depends on the lender and your personal circumstances. Any offer of a second charge mortgage LTV relies on a range of factors. These include:

  • Whether the property is a residential home, a buy to let property, an HMO, or a commercial building.
  • How much equity you have in the property.
  • Your financial history and credit score, and how healthy your future finances look.
  • Underwriting policies that your lender has in place.

Remember, the higher the LTV, the greater the risk to a lender. This means that you’re always likelier to enjoy a higher second charge mortgage LTV if you have a clean credit history, a high level of equity, and are taking out the loan against your primary residence.

How does equity impact how much I can borrow on a 2nd charge mortgage?

Your second charge mortgage LTV will be determined by how much equity you have in your property.

While the amount of equity matters, it’s the overall LTV that ultimately impacts how much you can borrow. A £1,000,000 property with a £900,000 outstanding mortgage has £100,000 of equity, but can’t be used for a second charge mortgage as it is already at 90% LTV.

How can I calculate my equity?

Equity in a property is a simple act of mathematics. Find out how much is left on your outstanding mortgage balance and remove this from the total value of your home. What’s left is equity. So, if you have £75,000 of mortgage repayments left, and your property is valued at £200,000, you have £125,000 in equity.

Does bad credit impact the LTV I can get on a second charge mortgage?

A higher credit score will enhance your options in all matters of finance, especially when looking to borrow money. This does not mean that bad credit will prevent you from gaining a second charge mortgage, but it will usually reduce restrict the second charge mortgage products available.

How much impact your credit score has depends on the root cause of your poor credit. There are many reasons why a credit score can drop. Comparatively minor infractions, such as late payments on a credit card, can be overlooked if you have a good reason.

More substantial concerns, such as defaults, CCJs, mortgage arrears or IVAs, can have a much more significant impact on your second charge mortgage LTV. If you have repaid an IVA early or settled the debt connected to a CCJ, you may enjoy a slightly higher LTV. You will need to explain what happened to the lender and reassure them that your financial difficulties will not return. If these concerns are ongoing, expect your LTV to drop as the lender attempts to manage risk.

How can I get a higher LTV ratio?

There are three ways to improve your second charge mortgage LTV. The first of these is to enlist the services of a broker when applying for a second charge mortgage. Brokers can access second charge mortgages that are not open to the general public, so it’s always advisable to enlist professional services. Contact ABC Finance to learn more about how we can help you get the best deal possible.

The second is to improve your credit score. The higher your credit score, the better your second charge mortgage LTV will likely be. There are multiple ways that you can look to improve your credit score, which include:

  • Download your full credit report and rectify any errors, such as missed or late credit card payments made on time or defaults, IVAs, or CCJs that have elapsed.
  • Get your unsecured credit borrowing below 50% of your total available credit. If you have savings, use some of this to pay off your credit card or loan balances. If not, see if you can increase your credit balances (and do not use these funds!)
  • Reduce your unsecured credit lines to two or three, if that is an option. If you have multiple credit cards that you do not use, close these accounts.
  • Pay as many bills as you can by direct debit rather than manually using a debit card. This shows that you can meet regular payment commitments.
  • Ensure you are listed on the electoral register.

If you can take these steps before applying for a second charge mortgage, your LTV will potentially be higher.

Finally, you could take out a private mortgage insurance policy. This will obviously be another monthly expense, so do not make this decision lightly, but it may offer a little more reassurance to your lender and thus enhance your chances of a superior second charge mortgage LTV. The lender will be assured that your mortgage insurance will cover any bills if you face financial difficulty.

Keep reading – Second charge mortgage affordability.

Does the security property affect LTV?

Yes, the security property affects second charge mortgage LTV. A residential property in good order will typically have the highest second charge mortgage LTV- sometimes as much as 95% if you have exemplary credit. A buy to let mortgage LTV is likely to be lower, usually capped at 80% and sometimes less. You may also need to pay a higher deposit on this second charge mortgage. A commercial property second mortgage LTV will have the lowest of all, rarely rising above 70%.