Second Charge Mortgages / Secured Loans

Second Charge Mortgages / Secured Loans

Second charge mortgages are often called second mortgages because they have secondary priority behind your main (or first charge) mortgage. They are a secured loan, which means they use the borrower’s home as security. Many people use them to raise money instead of remortgaging, but there are some things you need to be aware of before you apply.

How does getting a second mortgage work?

• You are only eligible for a second charge mortgage if you are already a homeowner.
• You do not necessarily need to live in the property.
• A second charge mortgage can be a loan of anything from £1,000 upwards.

How much can you borrow on a second mortgage?

A second charge mortgage allows you to use any equity you have in your home as security against another loan (Equity is the percentage of your property owned outright by you (i.e. the value of the home minus any mortgage owed on it).

It means you will have two mortgages on your home.

Are you eligible?

• Lenders have to make the same affordability checks and reviews as for a main or first charge residential mortgage.
• Borrowers will have to provide evidence that they can afford to pay back the loan.

Why take out a second charge mortgage?

There are several reasons why a second charge mortgage might be worth considering:

• You might be struggling to get an unsecured loan, such as a personal loan, perhaps because you’re self-employed.
• Your credit rating may have gone down since taking out your first mortgage, remortgaging could mean you end up paying more interest on your entire mortgage, rather than just on the extra amount you want to borrow.
  If your current mortgage has a high early repayment charge, it might be cheaper for you to take out a second charge mortgage rather than to remortgage.

Example

Jack and Jill have a £200,000 five year fixed rate mortgage with three years to run until the fixed rate deal ends. The value of their home has risen since they took out the mortgage.

They have decided to start a family and want to borrow £25,000 to refurbish their home. Should they remortgage or take out a second charge mortgage?

• If they remortgage, they’ll have to pay the £10,000 penalty and there’s no guarantee that they’ll be able to get a better interest rate than the one they are currently paying – in fact they might have to pay more.
• If they take out a second charge mortgage, they will pay a higher interest rate on the £25,000 than they pay on their first mortgage, plus fees for arranging the second charge mortgage. However, this will be far less than paying the £10,000 early repayment charge and possibly a higher interest rate on their first mortgage.

Jack and Jill decide to take out a secured loan that doesn’t have any early repayment penalties beyond three years (when their main mortgage deal ends). At this point they can decide whether to see if they can remortgage both loans to get a better deal overall.

When not to use a second mortgage

In 2014, 447 properties were repossessed by second charge lenders. Source: Finance and Leasing Association

Although second mortgages can be useful, taking one out is a big step and you need to weigh up the pros and cons.

• If you’re already only just managing to repay your mortgage. You could lose your home if you cannot keep up repayments on either your mortgage or the second charge mortgage.
• To consolidate debts. Using a second charge mortgage – which can run for up to 25 years – to pay off smaller debts, such as credit cards or small unsecured loans, will mean you might end up paying more interest in the long term. You are also converting unsecured credit into secured credit, which could increase the risks of having your property repossessed.

What if you move house?

If you sell your home, you will need to pay off your second charge mortgage or transfer it to a new mortgage.

Why use a mortgage broker?

Getting advice from a qualified mortgage adviser is crucial in helping you find the loan that best meets your needs and financial situation. They will have to follow the rules as set out by the FCA when dealing with you.

The risks and alternatives

• As a second charge mortgage works very much like your first mortgage, your home is at risk if you don’t keep up the payments.
• If you sell your home, the first charge mortgage gets cleared in full before any money goes towards paying off the second charge, although the second charge lender can pursue you for the shortfall.

Personal loans and remortgaging

• If you need to borrow a small amount of money you’re better off going for an unsecured product such as a personal loan.
• If you don’t have a large early repayment charge on your mortgage, you have some equity in your home and your circumstances haven’t changed, you’ll probably be better off remortgaging or taking out a further advance from the same lender.

Your home may be repossessed if you do not keep up repayments on your mortgage