How Does a Second Mortgage Work?

A second mortgage or ‘second charge’ mortgage is a popular way to raise finance in the UK. It is based on an existing homeowner who already has a mortgage to apply for another mortgage secured against their property.

Being second, it is the second priority when it comes to monthly repayments – hence it is known as second charge. So when it comes to making mortgage repayments, the money goes from your first mortgage initially and then once this is paid, money is collected from your second mortgage payment.

Your loan is always secured against a property that you owe and you are risk of this property being repossessed by the bank or lender if you do not keep up with repayments.

Second mortgages are virtually synonymous with ‘secured loans’ that are secured against your home, flat, office or other property. Many lenders and brokers look at them in the same light. You are able to borrow against whatever equity you have in your existing property, so the more you have paid off, the more you can likely borrow. See MoneyAdviceService.

What are second mortgages used for?

Second mortgages have several uses including raising finance, debt consolidation and investment purposes.

The opportunity to raise finance is very appealing, since you are using money from your existing property and your record as an individual who has been paying off their mortgage on time for years.

This money can be used to fund your lifestyle including weddings, new cars, holidays, home improvements or pay off your existing debts – so that they do not continue to accrue interest.

You regularly hear about high-risk entrepreneurs who get a second mortgage in order to launch their business – albeit at great risk.

Property investors will commonly use second mortgages in order to buy another property. This could be in order to develop it, improve it and sell it for a higher amount or rent it out to tenants. But investors will not exactly use their first mortgage, because this is where they live.

How much can I borrow from a second charge mortgage?

The amount you can borrow from a second mortgage is typically less than your first mortgage, because this is first port of call when it comes to monthly repayments. Since the second mortgage lender is second in the queue, they have to lower the amount you can borrow to mitigate the risk. In practical terms, this could mean borrowing at a 50% or 60% LTV compared to a first mortgage at 70% or 80% LTV.

However, the amount you can borrow will also depend on your credit rating, age and employment with those with good affordability likely to maximise their borrowing facility.

It also depends on the type of mortgage broker you use and their access to different mortgage products across the UK.

Can you have more than one second mortgage?

Yes, you can have multiple mortgages on your property or on several properties – this is how people build a portfolio. However, the amount you can borrow and the rates you are charged are fundamentally reflected on your income and affordability.

Do you need a deposit for a second mortgage?

No, because a second charge mortgage is more like releasing equity from your existing property. It is practically a secured loan and you are just borrowing the amount that you have already paid and the equity that you already have in your property.

Can I get a second mortgage with bad credit?

Yes, in fact, second mortgages are more appropriate for those with bad credit because you are leveraging the value in your existing property in order to get the finance you need.

The lender will be taking a stake in your property and if you fall behind on repayments, you are at risk of this being repossessed.

Whilst regulated mortgage brokers and lenders are required to run credit checks, there are a number of non status lenders who look at the value of your property instead of your credit history to determine their decision – and this is a very common way to borrow money.

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