Second Charge Mortgages

Our beginner guide to second charge mortgages

What is a second charge mortgage?

A second charge mortgage is a type of secured loan that homeowners who still have a mortgage can take out using the equity in their property as security. It can provide a way to raise funds for various purposes, including home improvements, but means that you’ll effectively have two mortgages to pay at the same time. A second charge mortgage will come from a different lender to the one that is behind the original mortgage on your property.

Second charge mortgages are also sometimes referred to as a homeowner loan or second mortgage. The latter can sometimes lead to confusion, as a second mortgage might also be a term used when getting another mortgage to buy a second property.

First charge vs. second charge mortgages: What's the difference?

A first charge mortgage refers to the standard mortgage that you take out to help you buy a home. It is the principal loan secured against your property, meaning the lender you take it from has the first legal ‘charge’ against your home, and must be repaid first if you sell up or don’t keep up with your mortgage payments.

By comparison, a second charge mortgage allows you to use the value you have stored in your home – your house equity – to borrow additional funds that can be used for any purpose. It will be from a different lender to your first mortgage, and each loan is treated as completely separate from one another. However, both lenders will need to agree to you being allowed to take out a second mortgage.

Similarities

First and second charge mortgages work in a similar way.The amount you borrow must be paid back over the mortgage term that you agree with the lender, and each will usually have fees that you’ll need to pay. Second charge mortgages can also be arranged on either a repayment basis, where your repayments pay off some of the loan and the interest each month, or an interest-only basis, where repayments cover the interest alone and the loan amount must be repaid at the end of the mortgage term.

Both first and second mortgages charge an interest rate that helps determine the monthly repayments that must be made, and rates on second charge mortgages can be either fixed or variable, as with standard first mortgages.

Both types of loan are also secured loans that use your home as security, meaning the property could be at risk if you fail to make the necessary repayments when you should.

Differences

One of the main differences is that the funds you receive from a first charge mortgage are lent to buy a home, whereas what you borrow by taking a second mortgage can be used for many different purposes.

And when taking out a second charge mortgage, the maximum amount that you might be allowed to borrow will depend on how much equity you have in your home, rather than the overall value of your property.

Second charge mortgage lenders also tend to charge higher interest rates than those on similar standard mortgages. This is to reflect the greater risk associated with being a lower priority behind first lenders if repayments aren’t made.

How do second mortgages work?

The funds that you borrow through a second charge mortgage must be paid back in line with the mortgage term that you agree with the lender when taking the loan out. Depending on the lender, you may be able to arrange a second mortgage term of up to 35 years.

You’ll make repayments each month until the loan, plus the interest that you’re charged, is paid off. Crucially, with your property being used as security for the loan, there is a chance you could lose your home if you fail to keep up with your repayments. As the lender behind your first mortgage gets precedence if payments aren’t made, second charge lenders could potentially explore other avenues to recoup what they are owed if there isn’t enough value in your home to cover everything.

How much can I borrow on a second charge mortgage?

The amount you can borrow will depend on the value of the equity you own in your home – this is the overall value of your property minus your outstanding mortgage balance – and how much a lender decides is affordable for you to pay back. This means your wider financial circumstances, income and credit score are important too.

How an actual amount is calculated will differ between lenders, although it will often be capped at around 75%-85% of the equity you have available. Lenders might be willing to lend you as little as £1,000 under a second charge mortgage, or several hundreds of thousands of pounds.

Do second mortgages hurt your credit score?

If you keep up to date with your mortgage payments, including on your original mortgage, having a second charge mortgage shouldn’t cause harm to your credit score and may even improve it.

Are second charge mortgages regulated?

Generally, second charge mortgages are regulated by the Financial Conduct Authority in the same way that it oversees traditional mortgages. One exception is where a second charge mortgage is raised against a buy-to-let property that you do not intend to live in and own solely for investment purposes.

How long does it take to get a second mortgage?

This will vary between lenders but generally you can expect to receive the funds from a second charge mortgage within three to six weeks. Second mortgages are usually quicker to arrange than a standard first charge mortgage.

How much will a second mortgage cost?

The interest rate you’re offered will depend on your circumstances, but generally second charge mortgage rates are slightly higher than on traditional mortgages. This is because second charge lenders need to price in the risk of being behind first charge lenders in terms of priority if you fall behind with your repayments and your property needs to be sold to pay back what you owe.

How much interest will I pay?

The less risk a lender thinks you pose as a borrower, the lower the interest rate you might be offered. Lenders assess borrower risk by looking at a combination of factors including the sum you wish to borrow in relation to the amount of equity you own in your property and your broader financial circumstances, including your credit score and income.

So if you own a high amount of equity and want to take a relatively small second charge mortgage (so you’re borrowing at a lower loan to value), you can usually expect to be offered a lower rate than someone with a smaller amount of equity who wishes to borrow most of it.

Similarly, having a good credit score might see you offered a lower rate than someone whose credit situation is worse.

The best way to get an idea of what you’ll need to pay is by getting a quote and comparing the second charge mortgage rates that apply to your specific circumstances.

Is a second charge mortgage expensive?

Second mortgage interest rates tend to be higher than the rates available on similar traditional mortgages to counter the extra risk taken on by second charge lenders.

Should you fail to keep up with your mortgage repayments, and your property needs to be sold to cover what you owe, the lender behind your first charge mortgage would receive their money first. Because of this, second charge mortgage lenders often charge higher rates to cover the increased risk that there might not be enough funds left to cover what they are owed once the first lender has taken what is owed to them.

Can my mortgage company refuse a second charge?

Your current mortgage lender might not allow you to take a second mortgage if it believes there is a risk you won’t be able to afford both repayments.

Is a second mortgage right for me?

Although this will ultimately depend on your personal circumstances, a second charge mortgage might be worth considering if you need to raise funds but are finding it difficult to secure a personal loan – perhaps because you’re self-employed or have a poor credit score – or can’t get a further advance on your current mortgage. It might also be the case that you can’t or don’t want to remortgage.

This could be because you’d have to pay early repayment charges to exit the mortgage deal you already have or because your current mortgage is a good deal that it wouldn’t make sense to leave. It might also be that you’d find it hard to remortgage, perhaps because of a recent deterioration in your credit score. If remortgaging would mean paying a higher interest rate, it could be better to take out a second mortgage alongside your current deal so that you then only pay a higher rate of interest on the additional amount you borrow, rather than on the whole new mortgage.

However, if you think a second charge mortgage might be right for you, it’s vital to remember that you’ll effectively have two mortgages to pay at the same time. Interest rates are also likely to be higher on the second charge mortgage. If you already find it difficult to pay your existing mortgage, remember as well that your home could be at risk if you fail to pay either your current mortgage or any second mortgage that you take out.

Why should I get a second charge mortgage?

There are many reasons you might want to get a second charge mortgage including if you:

• need funds to pay for home improvements
• want to consolidate existing debts
• need funds to cover school fees, a new car, a tax bill or to help family and friends
• need a deposit to buy another property, such as a buy-to-let property
• want to extend a lease,

but also:

• can’t secure a further advance from your current mortgage
• are finding it difficult to get an unsecured loan
• can’t or don’t want to change your existing mortgage
• have a poor credit score, which might stop you getting a good remortgage deal
• don’t want to pay the early repayment charge to switch from your current mortgage

Can I get a second charge mortgage?

Whether you can get a second charge mortgage will depend on your personal circumstances and wider financial situation, although crucially, you will need to be a homeowner and have a certain amount of equity in your home to borrow against.

Eligibility criteria

This will differ between lenders but, as happens when taking out a first mortgage, second charge lenders must conduct checks to try to make sure you can afford a second mortgage. This involves evaluating your income against your outgoings, including taking into account your existing mortgage and repayments, as well as other loan commitments you might have.

At the same time, second charge mortgage lenders are likely to consider your credit score, the value of your home, whether it will be easy to sell, and how long you’ve lived there when deciding if you’re eligible for a second mortgage.

The lender behind your first mortgage will also need to be satisfied that you can afford to take a second charge mortgage, and grant permission for you to have one.

What to consider before taking out a second mortgage

Before taking out a second charge mortgage, it’s vital to work out whether you think it’s affordable and you really need the loan. Think carefully about the risk that you could lose your home if you can’t keep up with the repayments on both mortgages as well.

Always consider all the alternatives to a second mortgage and if you still think it’s right for you, be sure to shop around and compare the second charge mortgages available to you.

» COMPARE: Second charge mortgages

When is a second charge mortgage a bad idea?

Taking a second mortgage isn’t likely to be a good option if you’re already struggling to keep up with the repayments on your first mortgage. If you think your finances will become too stretched in having to make repayments on a second mortgage alongside your first, it’s almost certainly a bad idea.

Talking to a mortgage adviser is a sensible way to help you evaluate your options and reach the correct decision.

Second mortgage calculator

Using a second mortgage calculator can help you work out and decide whether it’s likely you can afford a second charge mortgage. It might also give you an idea of the amount that you’re able to borrow.

How many second mortgages can I have?

It might be possible to get a third charge mortgage alongside your first and second mortgages, although it isn’t very common. Getting a third mortgage will rely on you having sufficient equity in your property, this new loan being affordable alongside your others, and each of your current lenders giving permission for the additional mortgage.

It’s also likely that a third mortgage on the same property will come with an even higher interest rate to reflect the risk the lender is taking on by being third in line behind the existing lenders for repayment should you fail to keep up with any of your mortgage repayments.

Can I move home with a second charge mortgage?

It is possible to sell up and move home, but your second charge mortgage will either need to be paid off or, if your lender agrees, transferred to your new home. Be sure to check whether early repayment charges are payable too.

Pros and cons of second mortgages

Depending on your circumstances, there can be certain advantages to second charge mortgages but potential drawbacks to consider too.

Pros

Some of the main benefits of a second charge mortgage include:

• It allows you to stay on your existing mortgage deal, which could be preferable if mortgage rates have increased or your credit score has deteriorated.
• You won’t need to pay any early repayment charges as you won’t be switching your current mortgage deal.
• It doesn’t involve extending the term of your current mortgage.
• The security you’re offering the lender by way of the equity you own in your home means you might be able to borrow more than through an unsecured loan.
• If you’re self-employed or have poor credit, it can be easier to get accepted for a second mortgage than for an unsecured loan.

Cons

The potential disadvantages of a second mortgage include:

• Second charge mortgage interest rates are usually higher than on first mortgages.
• You’ll effectively have two mortgages to pay at the same time.
• You risk losing your home if you fail to keep up the repayments on either your initial mortgage or your second mortgage.
• Second charge lenders can pursue you for the money they are owed if you fall into difficulties and the sale of your home doesn’t cover both your original and second mortgages.
• You’ll have to clear both mortgages if you want to sell your house, which could limit your deposit for a new property – unless your lender agrees to transfer your second mortgage to your new home.
• Second mortgages can have early repayment charges and other fees, similar to traditional mortgages.
• You need permission from your existing mortgage lender to get a second mortgage.

How to apply for a second mortgage

The process of how to apply for a second charge mortgage is likely to differ between brokers and lenders but, as a general guide, you might expect the following steps:

1. Initial contact: When you first get in touch, you’re likely to be offered the chance to talk to a financial adviser to discuss your needs. It’s best to have some basic personal information to hand and be ready to share details about your financial situation, current mortgage, the amount you wish to borrow and for how long, and your plans for using the funds. This will help the adviser to come up with a suitable recommendation for you.
2. Decision in principle: If you wish to proceed, the next step is waiting for a decision in principle (DIP) from your lender. This is a promise that you can have the loan as long as the information you’ve given is accurate and there are no problems when a property valuation is carried out on your home.
3. Preparing the application: Once you’ve received a DIP, you can apply for your mortgage. You’ll need to provide various documents, usually including proof of your identity and address, income and expenditure, and paperwork relating to your existing mortgage. You can then submit your application.
4. Property valuation and underwriting: To make sure your property is worth what you say, and check for potential problems, the lender will arrange a valuation on your home. Its underwriters will also double-check all of the details and paperwork you’ve supplied.
5. Mortgage offer: If all is well, your lender will make you a mortgage offer.
6. Completion: If the offer is acceptable to you, sign the documents where required and a date will be arranged when the funds will be made available to you.

Second mortgage requirements

Different brokers and lenders are also likely to have varying requirements for arranging a second mortgage, but generally these will include the following:

• Payslips from the last three months, your most recent accounts, and your annual mortgage statement. Proof of your address and identity will also be needed.
• A valuation on your property – often for a second mortgage, a desktop or automated valuation conducted online will suffice, which is likely to be free. Alternatively, a lender might request a drive-by valuation, where a visit is paid to your home but an assessment is made without going inside, or a physical valuation, where an internal inspection takes place. The lender decides which valuation is needed, but if there is a cost to pay, you’ll probably need to cover it.
• The consent of your first mortgage lender – this is the written permission from your existing lender that it is happy for the second mortgage to proceed. It’s best to check whether your current lender is likely to agree to this when you first start considering a second mortgage as a potential option.

While you don’t always need to get formal advice to arrange a second charge mortgage, some lenders might insist you do, and it could help you avoid taking out a loan that isn’t best suited to your needs.

» MORE: Do I need mortgage advice?

Alternatives to second charge mortgages

It’s always best to explore the alternatives to a second mortgage before setting the wheels in motion on any formal application. Among the potential options you might want to consider are:

Using your savings

Assuming you can leave enough money set aside for emergencies, it may be worth dipping into any available savings rather than taking out a second mortgage. If you don’t have savings readily to hand, perhaps work out how long it might take to save up the amount you intend to borrow.

Further advances

Taking a further advance is where you borrow more from your existing mortgage lender. The rate will usually be different to the one you pay on your original mortgage, but it might still be lower than what you’re charged for a second mortgage elsewhere, and you won’t have to remortgage or switch lenders. Talk to your current lender before applying for a second mortgage, as you’ll need their consent for it to happen anyway.

Personal loans

A personal loan might prove a better alternative if you only need a small amount of funds. It doesn’t involve putting your home at additional direct risk either. However, remember to check the interest rates, particularly as unsecured loans tend to cost more than loans where you can provide security.

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Remortgaging

Remortgaging to borrow a larger amount may be viable if you have equity in your home and there are no, or relatively small, early repayment charges for exiting your current mortgage deal. If your credit score has improved, you’ve built up extra equity, or interest rates generally have fallen since taking out your original mortgage, you might even be able to secure a better deal. Of course, the opposite might be true if you now have poorer credit or rates generally have increased.

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