If you need to access cash and you have equity in your property over and above your mortgage, you may be able to get a second mortgage. This could be for a variety of reasons, such as building an extension, making home improvements, or wanting to pay off debts.
These mortgages allow you to take out a second loan against your existing property to release funds. They work exactly like first mortgages, where you borrow a lump sum and repay it over time, but you borrow against the equity in your home instead of the total value of the property.
The second mortgage sits on top of your existing mortgage meaning you’ll have two lots of repayments on the same house.
Just like with any mortgage, the second mortgage is subject to a legal charge, which means your lenders can repossess the property if you don’t repay.
A second charge mortgage is different from taking out a new mortgage to buy a second home, pied a terre, holiday home or buy-to-let property – although the two are often confused. For clarity, these are called mortgages for a second home.
A second charge mortgage is an additional mortgage on an existing property you own. You can take out a second mortgage on the home you live in (your main residence), but it is also possible to get one on other properties you own, as long as you meet the criteria. But it means having two mortgages on one property.
This type of finance is growing in popularity. The Finance & Leasing Association (FLA) said there were 25,877 new second charge mortgages in 2021 – a 44% increase from the previous year.
When you take out a second charge mortgage, you are accessing a secured loan, which uses the equity in your home as collateral. You’ll also have your original mortgage, which means two lots of repayments to make each month.
The equity in your home (the amount you own over and above the mortgage) will need to be large enough to allow a second mortgage and still leave a deposit.
The first lender has the first charge on your home if you default and the second lender has a second charge. If you default on either, you risk your house being repossessed.
Generally speaking, second charge mortgages are an option you might want to consider if you want extra funds but don’t want to remortgage. For instance, because you will be hit by early repayment charges or fees if you remortgage, or if you’ve got a great deal you don’t want to lose. You can take out a loan against the excess equity and make repayments over time.
Second charge mortgages come under the FCA’s rules, so lenders will have similar affordability rules. As with first mortgages, the interest rates you pay will depend on your credit rating. However, you’ll probably have to pay higher rates on a second mortgage than on a first. It’s important to shop around to minimise the costs.
The Society of Mortgage Professionals says second mortgages offer borrowers access to a range of loan sizes, typically from £10,000 to £1,000,000. It adds that loan terms are typically from 3-30 years.
A second mortgage is just another term for a second charge mortgage. They mean exactly the same thing, which is a second mortgage charge on top of a property you already own. You’ll have two loans, two sets of repayments, and two charges all against the same house.
It is sometimes confused with a mortgage on a second property, for instance, if you’re becoming a landlord or want a holiday home. In fact, this is quite separate. When you buy a new property, you’ll be getting a new mortgage, meaning there is only one charge. In this situation, one lender will have the right to be repaid from the sale of each property if you cannot afford the monthly mortgage costs and default.
Second charge mortgages are typically used in similar ways to remortgaging. They’re worth considering if you want to access the capital in your home. Some examples of when you might want a second-charge mortgage include:
Consolidation of existing debts
Accessing funds to help children with a deposit for their own home
Borrowing money over the long term at a good interest rate
Accessing funds without paying early repayment charges or getting a good mortgage deal
Borrowing money without affecting an existing interest-only deal
The Society of Mortgage Professionals adds: “Larger loan applications can be particularly beneficial to high net worth borrowers, for example where they are carrying out significant improvements to higher valued properties or business purposes.
“Where second charge mortgages can offer real flexibility is in the fact that the new loan can be taken out on a separate term to the first charge mortgage. For example, the borrowers have a repayment mortgage with 15 years left to run, but to keep the payments as low as possible they wish to take the second charge out over 20 years.
“With second charge rates at a record low starting from around 3.6%, seconds can be a cost-effective way of raising additional capital without disturbing… existing mortgage arrangements.”
Colin Payne, associate director, Chapelgate Private Finance agrees: “A borrower may have an interest-only mortgage and by asking for additional finance it could result in the whole mortgage having to be repaid on a capital and interest basis, substantially increasing the mortgage payments. A second charge may allow the original mortgage to remain on interest only, enabling mortgage payments to remain low.
“Other examples where a second charge could be appropriate is when the borrower has had financial difficulty after their mortgage was completed, resulting in adverse credit or mortgage arrears. The mortgage lender may not want to lend any further monies and instead of remortgaging to a new lender on a much higher rate, the cheaper terms can remain on the main mortgage and a second charge effected only for any additional funds required.
“Furthermore, it could be appropriate to assist with debt consolidation where generally speaking, mortgage lenders are much more cautious.”
If you want to borrow extra money against the equity in your home, remortgaging and second charge mortgages are both options to consider.
Remortgaging is when you take out a new mortgage that replaces your existing one. This can be for the remaining amount you owe, or you can borrow extra on top if the value of your home has increased.
Around a third of mortgages in the UK are actually remortgages, as people often switch to get better value. For instance, once a fixed rate or introductory offer ends it makes sense to look for a better deal.
Here are the main differences between the two approaches:
|Second charge mortgage||Remortgaging|
|Your current mortgage stays in place under the terms you signed up with||Your current mortgage is replaced with a new one, under new terms|
|The amount you can borrow will be based on the equity in the home you own (how much above the value of the mortgage)||The amount you can borrow is based on your outstanding mortgage plus the extra amount you want to borrow|
|Interest rates are typically higher for second mortgages than first mortgages, but you will be able to keep the current deal on your first mortgage||You might be able to get a better interest rate based on a lower loan-to-value ratio, but the interest rate could go up, for instance if your credit rating has fallen|
|You’ll have two monthly repayments on the property||You’ll have one monthly repayment on the property|
|You won’t face any early repayment fees or charges||You could face early repayment fees, depending on the terms of your first mortgage|
|It doesn’t matter how much is left on your mortgage||If you’ve only got £50,000 left on the mortgage it might not be worth switching due to fees and charges|
|Should be avoided if you’re struggling with existing mortgage payments||Could help you reduce existing mortgage payments|
You might get a better rate
You can get a fixed rate if you’re worried about interest rates
You can borrow extra money if the value of your home has increased
A new mortgage might let you make overpayments
You can switch from interest-only to repayment
You can get more flexibility
You might not find a better deal, particularly if your circumstances have changed
You could face early repayment fees and charges
You’ll have to explain what you want the money for if you borrow more
Extending could mean paying interest for longer
You may not be able to switch if there’s only a small amount left
Allows you to borrow against the equity in your home
You won’t change the terms of your existing mortgage
You might be able to secure interest-only payments for the extra borrowing
You can spread the cost of the loan over up to 30 years
You can borrow without incurring early repayment charges on your existing mortgages
If your credit rating has dropped or your circumstances have changed, this might be cheaper than remortgaging
Interest rates are typically higher than on first mortgages
You’ll need significant equity in your home to borrow
You’ll have two repayments on one property
You’ll have higher outgoings each month
If you fail to make payments you could lose your home
You’ll need to pay back both mortgages if you move
If you’re not sure that a second mortgage is right for you, there are other options to consider. These include:
Remortgaging: This is a new mortgage that replaces your old one. You can borrow more if your house has grown in value.
Personal loans: You could also consider a personal loan from the bank. You can look into unsecured loans or secured loans made against the equity in your home.
Credit cards: If you’re looking to make home improvements, you could consider using a 0% credit card to split the costs
Savings: Dipping into savings will avoid you having to pay interest on loans, credit cards or mortgages.
Before taking out a second mortgage, make sure you consider the following:
Is a second mortgage the best way to access the money? Have you compared costs with other options, including remortgaging, loans, credit cards and savings?
Have you considered speaking to an independent financial adviser to find out what the best option is for your circumstances?
Can you easily afford the repayments? What will happen if interest rates rise?
Have you shopped around to get the best possible second mortgage rates?
Have you read all the terms and conditions carefully, including fees and early repayment charges?
According to the Society of Mortgage Professionals, most second charge mortgages are valued between £10,000 and £1,000,000. However, the amount you can borrow will depend on the equity in your home.
For instance, if your home is worth £350,000 and your first mortgage is £150,000, you have £200,000 of equity. The lender will then decide how much of that you can borrow. Some will have a cap, for instance, 70% or 80% of the maximum available. The provider will also check affordability, so you will only be able to borrow what you can afford to repay.
Most lenders will also have a minimum value that you’re allowed to borrow, which could be as low as £1,000, but some will only consider lending for higher amounts.
You’ll need a valuation to show the current value of your home.
Yes, interest rates for second charge mortgages are typically higher than first mortgages or remortgages. This means that remortgaging is usually more cost-effective. But if you would face high early repayment fees or have a great deal on your existing mortgage, a second mortgage can help you borrow extra cash without losing out.
Generally speaking, second mortgage lenders tend to have more flexible lending models, which means some people might find them easier to access than a remortgage deal. However, not every lender offers them, and not all brokers deal with them. Some brokers refer clients to specialists when a second mortgage is required.
Colin Payne, associate director, Chapelgate Private Finance, said: “Generally speaking, the first port of call for any additional finance would be the mortgage lender holding the first charge. However, there could be situations where this lender is not prepared to lend or lending it could have consequences for the mortgage.
“Second charges are essentially a second mortgage. It’s possible to repay them on a capital & interest or interest-only basis, depending on circumstances and also to take advantage of fixed rates or variable rates.
“The rates charged will be higher than a first charge mortgage given the additional risk the lender is considered to be taking on. There will be associated costs, i.e. valuation and lender arrangement fees. The latter should be considered dependent on the level of borrowing as it may be beneficial to pay a higher rate and find a product with lower fees.”
The process for a second mortgage is very similar to that for a first mortgage. Here are the main steps:
Calculate the equity in your home: Deduct your mortgage from the current value of your home.
Think about how much you need to borrow based on the equity available.
Speak to a mortgage adviser or compare online to see what deals are available.
Compare costs with other forms of lending to make sure a second mortgage is right for you.
Once you have chosen a product, the lender will provide you with a Key Facts Illustration detailing all the costs – read this carefully.
Apply to the lender, using a soft search where possible to protect your credit rating.
If a lender thinks you meet their criteria, you will be issued a Second Charge Mortgage in Principle.
If you wish you proceed, you will need to supply bank statements, pay slips/accounts, employer details, and proof of identity
You will then need a valuation to prove how much equity is in the house.
If the lender is happy, they will send you a formal offer, including any fees. Read this carefully.
If you’re happy to proceed, the lender will transfer the funds into your account.
LTV, or loan-to-value, is the percentage you are borrowing of the property value when you get a mortgage. IT affects the interest rates lenders chargeLearn more