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  • Chris Warner

Second charge mortgages

What is a second charge mortgage? This is a second mortgage that will sit behind your current first mortgage lender in terms of preference on the title deeds of your home. It enables you to access equity (capital) in your home and use this as security for the new second mortgage. If you take on a second charge mortgage, you will now have two mortgages secured on your home.


A second charge mortgage can be a good alternative to a conventional remortgage option. Especially if you have penalties with your current first charge mortgage lender due to a fixed rate deal, for example.

You can only take out a second charge mortgage if you already own a property (your own residence, a buy to let investment property or second home, for example) and if you already have a first charge mortgage placed on it. You will need capital or equity (in most cases) to be used as security for the second charge.


A simple calculation can be used to work out how much equity you have available in your property:


Value of your property - Existing mortgage balance = Available equity.


In order to be able to take out a second charge mortgage you will usually need the permission of your existing mortgage lender (consent) and also be able to prove to the new second charge lender that you are able to afford the new monthly repayments in addition to your existing commitments. There are some lenders that do not need the first charge mortgage lenders consent, they tend to charge higher rates due to the further increased risk.


In the future if you are unable to pay either your first charge or second charge mortgage, you home could be repossessed as a result. You should think very carefully before securing any additional mortgage on your home or other properties owned.


Overview of Second charge mortgages


The amount of money that can be borrowed on a second charge mortgage can vary from £20,000 upwards. They can also be available for much higher loan to values (the percentage of your mortgage against the value of your property) than a conventional mortgage. I have seen lenders offering up to and over 100% in some circumstances! These can also be used for any legal purpose (subject to lenders criteria). Older applicants can be considered up to age 85. Fast underwriting and fast completion are also available. Lenders can offer up to 6 x income multiples which is much more generous than a conventional first charge mortgage and may enable you to get the maximum amount you require. Some lenders may even lend above the 6x income multiple and will assess the affordability based on your income and household expenditure. This ultimately provides more flexibility in the amount you are able to borrow.


Due to the high-risk nature of a second charge mortgage, lenders tend to charge a higher interest rate than a conventional first charge mortgage lender, however this may still be lower than other forms of credit, like unsecured loans or credit cards. Typical rates start from 3.37% (at the time of writing) so not too dissimilar to a conventional first charge mortgage. Some products are also available without any early redemption penalties so you can repay them and fully refinance if necessary or able to at a later date to suit you, in line with your first charge mortgage deal, for example. Please note the higher rate would only be charged against the additional borrowing amount therefore, in some circumstances it can work out more cost effective than first thought.


There will be pros and cons to taking out a second charge mortgage and these should always be taken into account when considering if this is right for you? I have summarised these below:


Pros

  • Allows you to keep any existing mortgage deal, i.e. a good interest rate currently or your credit is not as good as when you secured your first charge mortgage

  • It may save you having to pay any early redemption penalties on an existing mortgage if you were to look at remortgaging as an alternative option.

  • Ease of underwriting. Second charge lenders tend to have better affordability models and larger income multiples which may enable you to borrow more, if required.

  • Can be more considerate if you have existing mortgage arrears with your first charge lender

  • Non-standard construction properties can be considered

  • Complex income structures can be accepted


Cons

  • You may lose your home if you do not keep up repayments

  • You will leave less residual equity in your home, meaning that if you wanted to sell your home in the future you will not have as much to take forward to a new purchase, for example.

  • Interest rates tend to be higher than a conventional first charge mortgage

There are several alternatives that need to be considered at the same time as a second charge mortgage. A conventional remortgage, even if you have a large early redemption penalty, this needs to be explored to see if overall it will still be cheaper for you. Using savings or investments rather than borrowing. Applying for unsecured loans are often overlooked by clients only needing a modest amount of money.


By utilising an expert mortgage adviser, we will look at all the available options for you and present these to you so you can make an informed decision on the best route forward for you and your circumstances.


If you need more information or If you want to look at how much you could borrow as a second charge mortgage, then please do get in touch.


Please remember, your home may be repossessed if you do not keep up repayments on your mortgage or any loan secured against it.


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