Second mortgages 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 sets of repayments on the same house.
Just like with any mortgage, the second mortgage is subject to a legal charge, which means your lender can repossess the property if you don’t repay.
A second mortgage is different from the mortgage you need to buy a second home, which requires a mortgage designed specifically for that purpose. You can’t use a second mortgage for a buy-to-let property, either – you need a buy-to-let mortgage for that. If you wanted to buy a new property, you would get a new mortgage, meaning you would have one charge on each property.
Second mortgages are also known as second-charge mortgages. Your first lender has the first charge on your home if you default, meaning it gets priority, and the second lender has a second charge. If you default on either, you risk your house being repossessed.
Second mortgages let you access the capital tied up in your home. They’re typically used for similar reasons to remortgaging. Some examples of when you might want a second mortgage include:
making home improvements
building an extension
consolidating existing debts
accessing funds to help children with a deposit for their own home
borrowing money over the long term at a competitive interest rate
accessing funds without paying early repayment charges
taking out a new loan without affecting an existing interest-only deal
borrowing money if you’ve had financial difficulties since you took out your first mortgage; this could prove to be cheaper than remortgaging
Remortgaging is when you take out a new mortgage that replaces your existing one. This can be for the remaining debt, or you can borrow more if the value of your home has increased.
If you want to borrow extra money against the equity in your home, remortgaging and second-charge mortgages are both worth considering.
Remortgages account for around 30% of residential mortgage lending in the UK, with people often switching to get better value. Once a fixed-rate or introductory offer ends, it makes sense to look for a better deal. Below are the main differences between second-charge mortgages and remortgaging.
The following points apply to second mortgages:
Your current mortgage stays in place under the terms you agreed to when you signed up
The amount you can borrow is based on the equity in your home (its value minus the outstanding mortgage)
Interest rates are typically higher for second mortgages than first mortgages, but you can keep the current deal on your first mortgage
You have two monthly repayments on the property
You won’t face any early repayment fees or charges
It doesn’t matter how much is left on your existing mortgage when you take out a second mortgage
You should avoid second mortgages if you’re struggling with existing mortgage payments
The following points apply to remortgaging:
Your current mortgage is replaced with a new one with different terms
The amount you can borrow is based on your outstanding mortgage plus any extra you want to borrow on top
You might be able to get a better interest rate if your loan to value has gone down, but your interest rate could go up if you’ve had credit problems
You have one monthly repayment on the property
You could face early repayment changes if you’re still within the initial deal on your existing mortgage
If you’ve only got a small amount left on your mortgage, it might not be worth switching
Remortgaging could help you reduce existing mortgage payments
Second mortgages have the following advantages:
They allow you to borrow against the equity in your home
The terms of your existing mortgage won’t change
You might be able to secure interest-only payments for the extra borrowing
You may be able to spread the cost of the loan over 30 years
You can borrow more without incurring early repayment charges on your existing mortgage
If your credit rating has dropped or your circumstances have changed, a second mortgage could be cheaper than remortgaging
There are also a number of disadvantages to second mortgages:
Interest rates are typically higher than on first mortgages
You need significant equity in your home
You have two repayments on one property
You have higher outgoings each month
If you fail to make payments you could lose your home
You need to pay back both mortgages if you move and can’t port them
The amount you can borrow will depend on how much equity you have 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, up to 85% 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 £5,000, but some will only consider lending higher amounts.
You need a valuation to show the current value of your home.
Yes, interest rates for second-charge mortgages are typically higher than for first mortgages or remortgages as they are riskier for the lender.
Second-charge mortgage rates typically vary between 3.5% and 7% or more, while the cheapest remortgage rate in the UK is currently 2.67% for a two-year fix. Even a 10-year fix can have rates as low as 3.31%. The cheapest two-year variable-rate deal has a rate of 1.24%.
This means that remortgaging is usually more cost-effective. However, if you would face high early repayment charges to leave your current deal or you have a great deal on your existing mortgage, a second mortgage can help you borrow extra cash without losing out.
If you’re not sure whether 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 consider a personal loan from a bank. You can look into unsecured loans or loans secured on your home, which let you borrow a lump sum over a set term.
Credit cards: If you’re looking to make home improvements, you could consider using a 0% purchase credit card, as this will let you spread the cost over several months interest-free.
Savings: Dipping into your 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 those on fees and early repayment charges?
A second-charge mortgage is just another term for a second mortgage. They mean exactly the same thing, which is a second mortgage on top of the existing mortgage you have on a property you already own. With a second mortgage, you have two loans, two sets of repayments and two legal charges against the same house.
If you’re a homeowner, have sufficient equity in your home and meet the lending criteria, you should qualify for a second mortgage.
The amount you can borrow is based on how much equity you have in your home. Different lenders have different rules, but the absolute maximum you can borrow will be the amount of equity in the property.
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.
You need a formal valuation of your property when you take on a second mortgage. The equity is your home's value minus the amount owed on your existing mortgage. If you want to see how much equity you might have without paying for a valuation, you can get an estimate from an estate agent or check the sale price of other properties in your area.
When you move house, you may be able to port one or both mortgages to the new property, which means you can take them with you when you move. If this isn’t possible, you’ll need to pay off both outstanding mortgages by taking out a new mortgage on the house you’re moving to. You may have to pay early repayment charges, though.
Yes. You can have a second mortgage (or second charge mortgage), which is when you have two mortgages on one property. You may also have multiple (first) mortgages for different properties if you own more than one house.
YOUR HOME/PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP WITH YOUR MORTGAGE REPAYMENTS.
The FCA does not regulate mortgages on commercial or investment buy-to-let properties.
Uswitch makes introductions to Mojo Mortgages to provide mortgage solutions. Uswitch and Mojo Mortgages are part of the same group of companies. Uswitch Limited is authorised and regulated by the Financial Conduct Authority (FCA) under firm reference number 312850. You can check this on the Financial Services Register by visiting the FCA website. Uswitch Limited is registered in England and Wales (Company No 03612689) The Cooperage, 5 Copper Row, London SE1 2LH. Mojo Mortgages is a trading style of Life's Great Limited which is registered in England and Wales (06246376). Mojo are authorised and regulated by the Financial Conduct Authority and are on the Financial Services Register (478215) Mojo’s registered office is The Cooperage, 5 Copper Row, London, SE1 2LH, and head office is WeWork No. 1 Spinningfields, Quay Street, Manchester, M3 3JE. To contact Mojo by phone, please call 0333 123 0012.