Second Charge Mortgage
If you own your own home and need access to funds, you may be able to take a second charge mortgage on your property.
Let’s take a look at what second charge mortgages are, the eligibility, pros and cons and whether they are right for you.
What is a Second Charge Mortgage?
A second charge mortgage is a type of loan that allows you to borrow money against the equity in your property, even when you already have a charge against it (such as an existing mortgage).
It is a separate loan taken out in addition to your existing first mortgage, without the need to remortgage or change the terms of your first mortgage.
Second charge mortgages can be a useful way to raise funds for various purposes, such as home improvements, debt consolidation, or meeting other major expenses.
The main reason you’d take one out?
If you currently have a good mortgage deal and don’t want to switch, or you would face high early repayment charges if you remortgaged, a second charge mortgage may be an option if you need to borrow more against your home.
We’ll go into these scenarios in more detail later.
Who Can Apply for a Second Charge Mortgage in the UK?
To be eligible for a second charge mortgage in the UK, you must meet certain criteria, including:
Being a UK resident and homeowner
Holding a first charge mortgage with a different lender
Having a good credit history
Demonstrating a stable income and the ability to afford repayments on both the first and second charge mortgages
How Much Can You Borrow with a Second Charge Mortgage?
The amount you can borrow with a second charge mortgage depends on several factors, such as the equity available in your property, your income, and your credit history.
In the UK, second charge mortgages typically allow you to borrow up to 85% of your property's value, minus the outstanding balance on your first mortgage.
When looking into second charge mortgages you can work out your affordability by using second charge mortgage calculators, this will give you a rough idea of what your monthly repayments will be.
Application Process for a Second Charge Mortgage
To apply for a second charge mortgage you can follow these steps:
Firstly, assess your financial situation and determine whether a second charge mortgage is the right option for you. Compare the costs of alternatives with the cost of a second charge mortgage too.
Research multiple lenders and compare their interest rates, fees, and lending criteria.
Gather the required documents, such as your proof of income, credit history, and property valuation.
Don’t forget to get permission from your current mortgage lender.
Submit your application to your chosen lender, who will then assess your eligibility and affordability.
If your application is approved, review the terms and conditions of the loan agreement carefully before signing and finalising.
As taking out a second loan secured on your home can be a risk and a large financial pressure, it is recommended that you seek independent financial advice if you’re unsure to find out the best options for you.
Fees and Charges Associated with Second Charge Mortgages
When taking out a second charge mortgage, be prepared to encounter various fees and charges, such as:
Valuation fees: A property valuation may be required to determine the amount of equity available in your home, and there will be a fee for this.
Legal fees: Solicitor or conveyancer fees may apply to handle the legal aspects of securing a second charge mortgage.
Lender fees: Some lenders may charge arrangement, administration, or booking fees for setting up your second charge mortgage.
Early repayment charges (ERCs): If you choose to pay off your second charge mortgage early further down the line, you may be subject to early repayment charges.
Pros and Cons of Second Charge Mortgages
Second Charge Mortgage Pros:
Access to additional funds without the need to remortgage or change the terms of your existing first mortgage (if your credit score is worse than it was when you first took out your mortgage, you might not want to remortgage your entire borrowing)
Potentially lower interest rates compared to unsecured loans, such as personal loans or credit cards, because it’s secured against your property
Flexibility to use the funds for various purposes, such as home improvements or debt consolidation, but also a wide range of personal uses
Second Charge Mortgage Cons:
Higher interest rates compared to most first charge mortgages
Additional fees and charges associated with setting up and maintaining the loan
The risk of repossession if you fail to make repayments on both the first and second charge mortgages
And this could also negatively affect your credit score
Alternatives to Second Charge Mortgages in the UK
Before opting for a second charge mortgage, consider exploring alternative options, such as:
Remortgaging: Replacing your existing first mortgage with a new one, potentially with better terms or a larger loan amount to cover your financial needs.
Personal loans: Borrowing a smaller, unsecured loan that does not require your property as collateral (although interest rates may be higher)
Further advance: Requesting additional borrowing from your existing mortgage lender, which is added to your current mortgage balance.
What is the advantage of a second charge mortgage?
Second charge mortgages allow you to access the equity in your property without remortgaging or selling.
They can be useful for home improvements, debt consolidation, or other major expenses, particularly if you don’t want to remortgage in the standard way to protect a low interest rate you’re currently getting.
Interest rates on second charge mortgages can be lower than those on personal loans, credit cards, or other unsecured debt.
Are second charge mortgages easy to get?
Obtaining a second charge mortgage depends on your credit score, income, and the equity available in your property.
While not always "easy" to get and come with a layer of risk, they can be a viable option for those who meet the lender's criteria and can demonstrate affordability.
What is the difference between a second charge and a remortgage?
A second charge mortgage is a separate loan taken out in addition to your existing first mortgage.
A remortgage involves replacing your current mortgage with a new one, potentially with a different lender or at a better interest rate.
Remortgaging means your entire mortgage balance gets a new interest rate, whereas a second charge mortgage will only result in a new rate for the new charge against your property.
Can a lender refuse a second charge?
Yes, a lender can refuse a second charge mortgage if they believe the borrower does not meet their affordability criteria, has a poor credit history, or if there is insufficient equity in the property.
How long does it take to get a second charge mortgage?
The application process usually takes anywhere from 4-6 weeks.
Can I remortgage to pay off a second charge?
Yes, it is possible to remortgage your property to pay off a second charge mortgage, provided you have enough equity and meet the lender's criteria for a new first mortgage.
What is the downside to a second mortgage?
Downsides to a second mortgage include higher interest rates compared to first mortgages, additional fees, and the risk of losing your property if you cannot meet the repayments on both the first and second charge mortgages.
Do you need a deposit for a second charge mortgage?
No, a deposit is not typically required for a second charge mortgage. Instead, the loan is secured against the equity you own in your property.
What is the maximum second charge mortgage?
The maximum amount you can borrow with a second charge mortgage depends on the lender, your credit score, income, and the equity available in your property. Some lenders may offer up to 90% of your property's value.
Can a second charge holder force a sale?
If you default on your second charge mortgage, the second charge holder can apply to the court for an order to force the sale of your property.
However, they will typically only do so if there is sufficient equity to cover both the first and second charge debts.
Does a second charge mortgage hurt your credit?
Taking out a second charge mortgage will appear on your credit report and may impact your credit score.
How do I put a second charge on my property?
To put a second charge on your property, you need to apply for a second charge mortgage with a lender, who will assess your eligibility, credit history, and the equity in your property before approving the loan.
What is the second charge affordability?
Second charge affordability refers to your ability to afford the repayments on a second charge mortgage, considering your income, existing debts, and other financial commitments.
Lenders will assess your affordability before approving a second charge mortgage application.
Second Charge Mortgages - Key Takeaways
Second charge mortgages, also known as homeowner loans, allow you to borrow money against your property's equity without remortgaging or changing your first mortgage terms.
Eligibility for a second charge mortgage depends on factors like UK residency, a good credit history, and the ability to afford repayments on both first and second charge mortgages.
You will need permission from your current mortgage lender before taking out a second charge mortgage
The amount you can borrow with a second charge mortgage depends on your property's equity, your income, and your credit history, typically up to 85% of your property's value.
Second charge mortgages come with various fees and charges, such as valuation fees, legal fees, lender fees, and early repayment charges (ERCs).
Alternatives to second charge mortgages include remortgaging, personal loans, and further advances from your existing mortgage lender.