Second mortgages are paid back alongside your existing mortgage.
You might want to consider a second charge or second mortgage if you’re locked into a fixed-rate period with your existing lender and need cash before this expires or would like to clear the extra debt faster than you would by remortgaging.
A second charge mortgage, is not the same as a remortgage. A remortgage deal allows you to pay off your existing mortgage and switch to a new mortgage provider, so you only have one mortgage to pay. Taking out a second charge mortgage means you will have two mortgages to pay.
A second charge mortgage is a secured loan, which you take out against your property. You use any spare equity on your existing property to raise enough money to buy a new home. Affordability checks on a second charge mortgage or secured loan are not as strict as a first charge mortgage because your existing home is used as security, whereas with a second mortgage you're simply taking out a brand new mortgage.
It’s called a second charge loan because it comes second in priority to paying off your first mortgage. For example, if you fail to keep up repayments or get into financial difficulties your house may be sold. The proceeds will go towards paying off your first mortgage, and the second charge mortgage after that is paid off.
You might consider remortgaging or second charge lending for the same reason: to raise extra cash.
Despite what the name might suggest, a second charge mortgage isn't quite the same as a traditional mortgage; a second charge mortgage is more like a secured personal loan. This means that a mortgage is technically a secured loan on the property you're buying, a second charge mortgage is a secured loan against the home you already own.
This means if you took out a second charge mortgage you would have two loans or two mortgages secured against the same property.
A first, or standard mortgage, is a loan based on your credit rating, the size of your deposit, your income, and general ability to repay the debt each month. Whereas a second mortgage is a loan based on the available equity in that same property.
Equity is the value of your current home money, less the outstanding mortgage on it. For example, if your home is worth £300,000, and there is £100,000 left to repay on your current mortgage, you have £200,000 worth of equity.
You will still need to prove your income and ability to repay the second charge loan monthly repayments, but your equity can increase if a property’s value rises over time.
A second charge mortgage allows you to get a loan secured against the equity in your property. So in the above example, you could get a loan secured on up to £200,000, depending on your credit rating and ability to repay both mortgages at the same time.
Second charge mortgages usually let you borrow money starting at £1,000. The higher the equity in your property, the more money you will be likely to be able to borrow.
To apply for a second charge mortgage you don't necessarily need a very good credit score. In fact, in some cases, you may still be able to get a second mortgage with a bad credit score.
In order to be considered for a second charge mortgage, you will need to be a homeowner. However, you don't necessarily need to be living in the property you're taking out the second charge mortgage on.
There are a few reasons why you might want to take out a second charge mortgage. However, before you determine whether you can get one, weigh up your options, a second mortgage can be a risky financial decision.
If you have been considering a second charge mortgage, the first thing to do is to decide how much money you need, and what you will be spending it on. You may be able to look at other ways of borrowing money with less risk attached.
For example, if you're looking at borrowing from a few hundred up to a few thousand pounds, then you may want to get a credit card. Some 0% purchases credit cards will allow you to avoid paying any interest for up to 18 months, and sometimes longer.
Similarly, personal loans could work out cheaper than a second charge mortgage, although you would need a very good credit rating for many of these options.
The pros of a second charge mortgage
The main attraction for a second charge mortgage is that people who have a less than perfect, or bad credit score can still be in with a chance of being approved.
Also, it might be easier to get a second charge mortgage if you have a fluctuating income or are classed as self-employed.
But before you apply for a second charge mortgage, get in touch with your existing mortgage provider. Ask them if they're able to give you any preferential or loyalty bonus rate if you were to take out an extra loan through them. If not, make a note of their rates anyway, as it could work out cheaper than getting a second charge mortgage.
Equally important is to compare prices from other lenders. See what their loan rates are like so you get a good feel of how much APR you could be paying. Even if you decide to scrap the idea of getting a second charge mortgage, you might find a personal loan deal that works for you.
Get all the facts, such as the early repayment fees, if any, how much the APR is, and what you would be expected to pay back each month and for how long.
Another reason people consider taking out a second charge mortgage is that it could work out cheaper than remortgaging when you want to raise extra money. In the below example we look at if it’s cheaper to remortgage or get a second mortgage.
Say, for example, you're paying for a £250,000 mortgage on a five-year, fixed-rate deal. You have one year left on that five-year deal, and you're looking to switch to a new deal and raise an extra £10,000 before your mortgage possibly moves to a more expensive interest rate. However, the remortgage deal has an early repayment penalty of £5,000.
If you were looking at gaining that extra £10,000 from the equity in your home, then remortgaging would cost you at a minimum £5,000 for repaying the mortgage early. On top of this, you would have to pay the interest on your new mortgage deal. You might have moved over to a better deal, but once that ends, you have no guarantees that the rest of the mortgage will work out cheaper.
With a second mortgage, you continue paying your first mortgage, so you avoid paying the early repayment penalty. However, your loan of £10,000 will most likely have a higher interest rate than on your remortgage deal.
Calculate how much interest you're likely to pay on your first mortgage on a 'worst case' basis. Budget for your repayments if the interest rates were to dramatically increase on your first mortgage. If it still works out cheaper than the rate you will get on your second mortgage, then you know to avoid taking out another secured loan.
Similarly, if you don't have an expensive early repayment penalty on your mortgage, then remortgaging is almost always going to be cheaper in the long run.
Remember, a second mortgage is secured against your home, so if you fail to keep up with repayments your property could be repossessed. You will have two mortgages that leave your home open to this risk, so it's best to avoid it if you are only just about managing to repay your existing mortgage.
Even if you decide to sell your home while having both mortgages, the money will go towards paying off your first mortgage before any of it is used on your second mortgage debt. This means that if there is still money outstanding on your second mortgage after the sale of your house, the lender will continue to chase you for the remaining debt.