Second Charge Mortgages

Around 28% of homes in the UK are currently owned with a loan or a mortgage. And this number is only expected to go up.

However, if you already have a mortgage on your property, you might think it difficult to borrow more on it. But that’s where second-charge mortgages come in. 

Second-charge mortgages might be a good option in case you don’t want/can’t remortgage, or can’t get a personal loan.

In today’s article, we are going to discuss all about second charge mortgages in detail and ensure that you’re left with no questions unanswered.

Let’s get started.

What Is A Second Charge Mortgage?

A second-charge mortgage is a kind of secured loan that uses equity in your property as collateral similar to a first charge mortgage loan. 

This can be secured alongside the existing mortgage on your home that you’re still paying back. The equity in your home that you own acts as the collateral in this case.

The amount you can borrow depends on the difference between the actual valuation of the property and the amount you still need to pay back on the first mortgage as a primary, alongside your personal income and credit status etc.. of course. 

It’s important to understand that a second-charge mortgage is entirely separate from the original mortgage on your home and it is with a different lender, a further advance would be a top up loan with your existing lender.  

It’s a good method to get access to extra funds usually where a remortgage has not been possible due to not meeting the lenders criteria, or you don’t want the penalties due to switching from your existing mortgage within an early repayment charge period. 

Using a second-charge mortgage, you can use your property itself to get extra money that can be used for multiple purposes, such as home repair and renovation. 

But it will mean the additional responsibility of paying off two mortgages on your property. Failure to pay can get your home repossessed.

Differences Between First And Second Charge Mortgages

A first-charge mortgage is the primary mortgage that is secured on your property. On the other hand, a second-charge mortgage is another secured loan on the same property, often taken from a different lender.

This second-charge mortgage is completely separate from your existing mortgage, and the money from the second-charge mortgage can be used for purposes such as home improvements or other capital raising needs that are allowable by the lender. 

How Does A Second Charge Mortgage Work?

A second-charge mortgage works rather similarly to a first charge mortgage, in that you usually borrow a set amount over a fixed term. This term can be as long as 30 years, and you’ll need to make monthly repayments to pay the loan back.

The primary risk of a second-charge loan is that since you’re taking out two loans on the same property, if you fail to repay one then your property will be repossessed. In case that happens, your property will be sold by the lender to recover the money. 

In this case, your primary first charge mortgage will have repayment priority, and only when it’s paid off in full can your second-charge mortgage be paid off. 

In case you don’t have enough equity to pay off both the loans, alternative action might be taken by your mortgage provider(s) to recover the amount such as requiring you to pay a shortfall. 

Another point to note here is that since a second-charge mortgage comes with more risk to the lender, they tend to have higher interest rates.

How Much Can You Borrow With A Second Charge Mortgage?

The amount you can borrow with a second-charge mortgage would depend on the amount of equity you own in the property and your current financial situation. Usually, the most you’ll be able to borrow will be around 75-85% of the equity available to you, however specialist lenders will go to a higher Loan to value ratio than this. 

Let’s illustrate with a simple example. If your house is worth £300,000 and you still have £200,000 to pay on your mortgage, then your available equity is £100,000. 

As you keep on paying your monthly amounts, this equity will increase. It’ll also increase if the property value goes up.

Now, the maximum amount that you can get is as an example 80% of £300,000 which is £240,000 (taking £40,000 from the remaining £100,000 leftover equity as a second charge loan). The percentage of equity that you can take out as a second-charge mortgage depends on the lender’s criteria and available products in most cases.

Situations When You Might Need To Take Out A Second Charge Mortgage

The following are a few situations when you might need to take out a second-charge mortgage:

1. For Home Repair And Renovations

A second-charge mortgage can be a good option if you need funds to repair your home. Since these improvements and repairs may ultimately add value to your property, or meet certain requirements. 

2. For Debt Consolidation

In case you have multiple active loans, you might want to consolidate them all into a single loan using a second-charge mortgage. 

You can use the funds you get from the second charge mortgage to pay off all your existing loans. This way, you have to keep track of just one loan and less monthly payments will also become easier.

However, this decision should only be taken after careful consideration, especially if you’re converting an unsecured loan into a secured loan. In this case, if you miss a payment, your property will be at risk of repossession.

3. In Case Of A Poor Credit Score

If you have a poor credit score, then it can be hard to get potential first charge mortgages or unsecured loans such as a personal loan. In such cases, the only option might be a secured loan such as a second-charge mortgage where you meet the lenders criteria. 

Since secured loans reduce the risk for the lender as the property is being offered as collateral, lenders may be more open to provide these even to persons with a poor credit history within their lending criteria. Of course this will be subject to individual circumstances. 

Advantages And Disadvantages Of A Second Charge Mortgage

Advantages

• You can usually borrow a get a greater sum of money and on a longer term than with unsecured loans. 
• There can be more flexibility with a poor credit score or other lending criteria when compared to a first charge mortgage.  
• It allows you to keep your existing mortgage. 

Disadvantages

• Risk of property repossession in case of missed payments 
• Higher interest rates than first-charge mortgages
• It might involve early repayment charges and other fees charged by the lender

Am I Eligible For A Second Charge Mortgage?

Any homeowner with an existing mortgage and equity in their property can take out a second-charge mortgage subject to meeting the lenders criteria. 

It does not have to be on the house that you live in; the mortgage can be taken out on a second home, or even a buy-to-let property potentially.

Of course, you’ll need to own enough equity in the home, and will also have to pass the lender’s eligibility criteria. This will determine how much you’re finally allowed to borrow. 

Along with the above, you’ll also need to get clearance from your primary mortgage provider for the second charge mortgage. 

Certain first charge mortgage lenders do not permit a second charge mortgage lender ranked behind them. 

Alternatives To Second Charge Mortgages

While a second-charge mortgage can be a good option when you can’t get a first charge mortgage or personal loan, they certainly aren’t the only ones. 

For instance, depending on your lender and the stage in which you are in the repayment journey, your existing mortgage provider might be able to give you an extended loan called a further advance. 

Remortgaging is also another option, and because it is a new first charge lender is usually a cheaper alternative. You’ll also need to consider the new interest rate that you’ll be moving to. 

Finally, if the amount you need to borrow is sufficiently small, you might want to take a loan from friends or relatives instead of going through the process of a second-charge mortgage due to its higher costs.

Frequently Asked Questions (FAQs)

1. How long does a second-charge mortgage take to get approved?

Usually, taking out a second-charge mortgage is faster than the time taken to take out a primary mortgage. Some lenders can get the funds to you even in a matter of days.

In any case, you shouldn’t have to wait for more than 2-4 weeks for the entire process but of course this will be subject to individual applications.

2. Is it allowed to take out a second-charge mortgage to fund a business?

This depends completely on the lender you’re taking the mortgage from. Some lenders will allow you to take out the mortgage if you have a viable business plan in place. Others, however, might not be so willing.

Here, it’s interesting to mention that second-charge mortgage lenders usually like to lend you money for home renovations. This is true because renovations increase the value of your property and in case they have to repossess your home they may get better value.

3. Can I pay off a second-charge mortgage early?

Yes, you can, but you might have to bear early repayment charges or exit fees. It’s best to check your loan agreement for the terms of early repayment.

4. Are second-charge mortgages controlled and regulated by the FCA?

Yes, absolutely! Since 2016, second-charge mortgages have been regulated by the FCA under the Mortgage Credit Directive. This regulation is intended to ensure that the interests of the borrowers are protected and they are treated fairly.