What is a second charge mortgage?
Taking out a second charge mortgage in the UK is becoming an increasingly popular route for homeowners to go down in recent years. The Finance & Leasing Association (FLA) published figures showing that last March, over £93 million of second charge mortgages were taken out, which is the highest figure since the financial crisis of 2008, partly as a result of these kinds of mortgages becoming regulated by the Financial Conduct Authority, as well the interest rates fallen on these products. But what exactly are they, and how do they work? TechRound takes a further look at when they can be useful, and how they may be able to help you as a homeowner.
Second charge mortgages explained
Also commonly known as second mortgages, second charges mortgages are when a borrower takes out an additional loan which is used instead of remortgaging or taking another form of funding. This kind of loan is secured against the property in question, and it is used to raise extra money.
It is important to remember that the traditional mortgage works differently to a second charge mortgage. This is because a second charge loan is secured against the home you already own, as opposed to a traditional mortgage where you are receiving a loan against a building you are intending to buying. However, it still means that you will have two mortgages on the home you own.
In addition, traditional and second charge mortgages vary in character because the first is a loan given to you based on the strength of your credit rating, income level and ability to meet monthly repayments. On the other hand, a second mortgage is a secured loan that is based on the available equity in that building.
Equity refers to the value of the home owned by you taking away any mortgage still owed on it.
As an example: if you have £150,000 left to pay on a mortgage for a house valued at £250,000, you will have available in £100, 000 in equity.
How does getting a second mortgage work?
As we have previously mentioned, you will only be able to get a second mortgage if you are already a homeowner. However, you can still be eligible if you own the house but don’t live in it. In terms of the amount that you can borrow under a second charge mortgage, it will depend on the lender in question, but loans are usually £1000 and above.
As a result of stricter UK and EU rules enforced partly by the FCA, lenders now have to apply the same affordability checks and ‘stress tests’ that are in place for people applying for a traditional mortgage, this means that the process for a second mortgage is now more rigorous, with homeowners now needing to provide evidence that shows that they will be able to pay back a secured loan.
Why should I take out a second mortgage?
There are a number of reasons why a homeowner may consider opting for a second mortgage (source: The Second Mortgage Company), such as:
- If you already have an existing mortgage with a high early repayment charge. In this scenario, it is quite likely that a second charge mortgage may be cheaper than remortgaging
- If you are self-employed you may find it difficult to get access to unsecured borrowing e.g. a personal loan
- If your credit rating is low or decreased since taking out the first mortgage. A second charge mortgage can be cheaper than remortgaging in this case as you will only pay additional interest on the new amount you would like to borrow
When not to use a second mortgage
There are a number of instances where getting a second mortgage can be beneficial. However, it may not be right for you if:
- You are wanting to get one in order to consolidate debts, as it could end up you pay a considerably more interest on paying off smaller debts, credit cards or other kinds of unsecured loans in the long term, as second charge mortgages can last for up to 25 years
- If you are only just about making repayments on your existing mortgage, as you could end up losing your home if you can’t keep up with either loan payments.
Things to consider before taking out a second mortgage
- Get advice from a qualified advisor before applying for a second charge mortgages, as they can give guidance as to which loan will be best for you. This is particularly important as financial advisors must follow rules outlined by the FCA, and if you choose not to get formal advice you may end up with a loan you can’t actually afford.
- Make sure you shop around and compare each lender/ APRC (annual percentage rate of charge) as well as the total amount you will have to pay back and the duration of the loan
- Ask your existing mortgage lender if they would provide you with a second charge mortgage and what they would charge for it