Second Charge Mortgage Risks: Is Your Home at Risk?
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When borrowing money, particularly when it is to be secured against your home, it’s natural for you to consider the risks and question whether it’s the right choice for you.
Much like first charge mortgages, second charge mortgages are completely safe when used correctly and borrowing is handled responsibly from the start.
The key to borrowing money safely comes down to being informed, and carefully considering things in a structured way to ensure things stay on track.
In this guide, we break down the risks of second charge loans, the impact on your credit score and what regulatory protections are in place.
Second Charge Mortgage Risks Explained
When looking to understand the risks of second charge mortgages, the first step is to understand secured debt vs unsecured debt.
In many cases, there is an element of debt consolidation when taking on this kind of loan, refinancing unsecured debts onto secured borrowing.
Should you default on an unsecured debt, your home is unlikely to be at risk, and the main impact will usually be damage to your credit score and difficulty securing credit for a period of time.
When defaulting on secured debt, the lender will eventually seek possession of your property should you fail to keep up repayments over a long time.
While this increases your risk on paper, the average saving for our debt consolidation second charge mortgage clients is in excess of £700 per month.
In many cases, our clients are already struggling to keep up repayments, and by reducing their outgoings, they reduce the chances of falling behind with all of their outgoings, including their mortgage.
This means that the reality is much more nuanced than the theory, and once the impact of financial struggles as taken into account, second charge borrowing can make a lot of sense.
This is a similar story with borrowing for home improvements, which can significantly increase your property value and quality of life.
The Risk of Repossession
As mentioned above, should you default on secured borrowing, you will eventually face the risk of repossession.
Repossession is always a last resort for lenders, and comes on the back of a significant number of warnings and steps, and can only be enforced on the back of legal action and approval from the courts.
In reality, repossession from second charge lending is rare as lenders always prefer a resolution, such as a payment plan or restructuring things to make them affordable.
How to Reduce The Risk of Repossession
There are several things you can do to keep the risk of falling behind on your payments, and ultimately repossession. They are:
- Borrow responsibly – The first and most important step is to borrow responsibly. This means only borrowing what you can afford to repay, both now and in the future. Consider any changes to your income, either through planned job changes, reduction in hours or other factors. Equally, consider the impact of interest rate rises if your borrowing will be on a variable interest rate basis.
- Maintain a sufficient financial buffer – When managing your finances, it’s always sensible to maintain a financial buffer. This means having a gap between your income and outgoings to ensure things stay affordable in the event of rising costs through inflation or other economic shocks. Also, an emergency fund should be maintained to cover unexpected expenses in the future, reducing the risk of you building up debts.
- Insure your risks – Adequate insurance is a sensible step to protect you financially. Life and critical illness cover pays out a lump sum in the event of either the death or diagnosis of a critical illness. Income protection and redundancy cover can cover a percentage of your income either on an ongoing basis, or for a set period of time in the event of accident, sickness or redundancy.
- Seek advice early if you’re struggling – Sometimes things can still go wrong, even with guardrails in place. If this happens, seek advice early and communicate with your creditors early. Where genuine problems have occurred, you’ll find that they’ll will be understanding, supportive and will work with you to find a solution.
Does a Second Charge Mortgage Hurt Your Credit Score?
Overall, a second charge mortgage won’t hurt your credit score. If payments are made on time, it can actually improve your credit score.
If clearing high interest debts, again, this can improve your credit score, especially if you were either unable to keep up the repayments, or were at risk of missed payments.
When you first apply, credit checks will take place, which may cause a small, temporary dip, but this is comparatively minor and unlikely to impact you in any significant way.
Finally, missing payments on your second charge mortgage would impact your credit score negatively, and in a fairly significant way. Missed payments on any debt will have a negative impact and should you miss several, it may become difficult to qualify for borrowing for a while after.
Regulatory Protections: The Role of the FCA
Under UK law, second charge mortgages are treated the same as first charge mortgages, meaning those secured against your own home (and not for business purposes) are fully regulated by the Financial Conduct Authority (FCA).
Should you run into problems, you will have a robust complaints process that can be followed and where appropriate, will have access to the Financial Ombudsman Service if needed.
These protections ensure strong regulatory oversight and ensure that you’re treated absolutely fairly and transparently.
Responsible lending protections
Responsible lending is a key tenet of the Financial Conduct Authority’s rules. Responsible lending refers to ensuring that any terms agreed by the lender are affordable, sensible and ethical.
For this reason, lenders must assess income, outgoings and the sustainability of any borrowing. This reduces the risk of borrowers falling into default and helps to reduce your risk of repossession in the long term.
Advice and disclosure requirements
When taking on this type of finance, you must be given a clear explanation of the risks, costs and terms of the borrowing. This must be backed up in writing to ensure things are well documented and clear.
Many cases, and many lenders also insist on advice being given by a qualified broker to ensure that the borrower is well informed and being advised by a professional.
