Representative Example: On an assumed loan amount of £750 over 12 months. Rate of interest 191.2% (fixed). Total repayment amount £1726.68 and total interest is £976.68. 12 monthly payments of £143.89. My Financial Broker is a broker, not a lender*.
* As a broker, we are unable to ascertain exactly how many customers take out a loan or the lender’s rate of interest particular to that customer, therefore our calculation is based on the mean APR of our panel of lenders.
What is a Second Charge Mortgage?
Using a second mortgage can be an effective way to raise money through your property. If you have built up equity in your home by paying off your mortgage over the last few years, you could borrow a large amount through a second charge loan.
It is known as a ‘second charge’ loan because it is essentially the second payment that is charged on your home each month (your main mortgage would be the first payment that is charged out). It is commonly used by households who need extra money to expand their home or pay off debts, and is also used by property developers to buy additional properties and expand their portfolio.
A second charge mortgage is classified as a secured loan, which is secured against your home and failing to keep up with repayments can put your property at risk of repossession. It can be secured against your existing home, or an additional home that you are borrowing against.
What is LTV (Loan-to-Value)?
If you haven’t considered the equity in your home before, LTV may be a term you’re unfamiliar with. But if you’re looking into remortgaging or selling your home, or releasing equity through a second charge mortgage, your LTV percentage becomes an important factor.
Basically, LTV is the percentage of a property that has been mortgaged, when compared to the percentage that you own (your equity). For instance, if you have a mortgage of £200,000 and your property is worth £250,000, you have a loan-to-value of 80%, and therefore have £50,000 as equity.
When Would You Use Second Charge Mortgages?
Below are some of the top reasons you may wish to take out a second charge mortgage:
To Raise Finance
Getting a second mortgage is a popular way in the UK to raise money, and in 2021 it was reported that Britons borrow up to £101 million worth of second charge mortgages a month. You are able to release money that has been built up in your home, so if you have spent years paying off your mortgage, you can now use this money tied up in your home to borrow funds. If you have ongoing debts, an upcoming wedding, a business venture, or need help with your daily expenses, it can be an effective and low cost way to raise money, with relatively low interest rates.
Property developers will use second mortgages to buy additional properties and build up their property portfolios. They may decide to rent out these properties to other members of the public or businesses, or sell them for a higher profit. Some property developers will have multiple second mortgages, provided that it meets their affordability.
Cheaper Than A Remortgage
If you need to remortgage because your current mortgage is too expensive due to a change in rates or your personal circumstances, you may find yourself paying higher interest rates or stuck with a large early repayment fee. In which case, if you are stuck in your current mortgage, but need extra funds, a second mortgage can be a viable option. Always take professional advice if this is the case.
Many UK households use second charges for debt consolidation loans, which involves putting all your existing debts into one single loan that you pay off each month. For many borrowers, this is an effective way to budget, pay off your debts and eventually become debt-free. You can borrow against your property and this money will be used to clear off existing debts and then you just pay back the loan and interest every month.
We love fixing up our homes, whether it is a new kitchen, conservatory or loft extension. Many people use second charge loans for home improvements, allowing you to take money from your home and invest it back in. Overall, you could find that this increases the value of your property significantly and ends up being a sound investment.
How Much Can I Borrow Through A Second Charge Loan?
The amount you can borrow through a second charge mortgage depends largely on how much you have contributed to your existing first mortgage. Essentially, the more you have paid into your mortgage, the more you can borrow on your second charge mortgage.
The maximum LTV is 85%, depending on the lender, but the LTV is typically lower than your first charge mortgage because the creditor is now second in line to receive any repayments. So if you have a month where you are stretched financially, the second charge mortgage provider will reason that it could be harder to recuperate their full funds.
Will They Run A Credit Check On Second Charge Loan Application?
Some second charge lenders will run a credit check on your application, since there are monthly payments involved and they want to get an indication that you can pay on time.
However, there are specific non-status second charge mortgage companies who are less interested in your credit status, and base their decisions around the value of your property and how much equity you have in it. So even if you have a bad credit history or have missed a few payments, there are a lot of lenders that will not run credit checks and take other factors into consideration.
What Is A Binding Offer For A Second Charge Mortgage?
If you have been provisionally approved, you will be given a ‘binding offer’ which gives you 7 days to consider the offer and decide if you wish to proceed. The offer will include:
- The terms of the offer
- Recap the details of your loan application
- A summary of fees, the APRC (Annual Percentage Rate of Charge) and changes to any interest repayments
- Provides a reflection period
Things To Consider
Whilst second charge mortgages can be a successful way to raise money against your home, there are some risks to consider. If you are struggling to keep up with your existing mortgage repayments, adding an extra loan and interest on top can add more pressure to your situation. Equally, if you are planning to move in the next few months or years, you will need to clear or transfer both your first and second charge mortgage and this could be costly.
Using second charge loans for debt consolidation can be convenient, but if you opt for long-term loans repaid over 20 or 30 years, it can end up being a lot more expensive in the long run. Your property is always at risk, and failing to keep up with repayments can lead to the repossession of your property.
It’s always important to weigh up the pros and cons when considering a second charge mortgage, but they could be a good option for someone looking for a loan.APPLY NOW