What is a second charge mortgage?
A second charge mortgage is a type of secured loan that allows you to borrow money against the equity you have in your property, while still maintaining your primary mortgage. It is called a “second charge” because it is a secondary loan secured against your property, after your primary mortgage, which is usually your first charge.
When should you consider a second charge mortgage ?
Avoiding early repayment charges: If you have an existing mortgage with early repayment charges (ERCs) and need to borrow additional funds, a second charge mortgage may be a more cost-effective option than remortgaging and incurring ERCs. This is because a second charge mortgage is taken out separately from your primary mortgage, so you can keep your existing mortgage deal intact.
Protecting your low-interest rate mortgage: If you have a low-interest rate on your primary mortgage that you do not want to lose, a second charge mortgage may be a good option to access additional funds without having to remortgage and potentially lose your favourable rate.
Consolidating unsecured debts: If you have multiple debts with high-interest rates, such as credit card debts or personal loans, consolidating them into a single second charge mortgage with a lower interest rate could help reduce your overall monthly repayments and save you money in interest charges.
Relaxed lending criteria: If you have a poor credit history or do not meet the strict lending criteria of mainstream mortgage lenders, a second charge mortgage may be easier to obtain, as the lending criteria is often more relaxed than that of primary mortgage lenders.
Quicker than remortgages: A second charge mortgage can be a quicker option to access funds than a remortgage, as the process of taking out a second charge mortgage is generally faster and less complex than a full remortgage application.
What can I use a second charge mortgage for?
A second charge mortgage can be used for a variety of purposes, depending on your financial needs and goals.
One common reason to consider a second charge mortgage is to consolidate high-interest debt, such as credit cards or personal loans, into a single, more manageable monthly payment with a lower interest rate.
This can help you pay off your debt faster and potentially save you money in interest charges.
Another popular use of a second charge mortgage is to fund home improvements, such as a new kitchen or extension, which can add value to your property and make it more comfortable to live in.
A second charge mortgage can also be used to extend a lease on a property, fund a business deal, or provide a deposit for another property.
Other potential uses of a second charge mortgage include purchasing a car, funding a wedding, or paying a tax bill.
How does a second charge mortgage work?
It is currently not possible to obtain a second charge mortgage through typical high street mortgage providers.
Instead, individuals seeking such a mortgage will need to utilise the services of a specialist lender, which can be accessed through a broker such as Strive Mortgages.
These specialist lenders are equipped to handle the unique requirements and risks associated with second charge mortgages
Pros and cons of a second charge mortgage
In addition to the benefits outlined above, second charge mortgages may also have the following advantages:
Potentially cheaper than some other forms of unsecured credit: Second charge mortgages may offer lower interest rates than other forms of unsecured credit, such as personal loans or credit cards. This is because the loan is secured against your property, which reduces the lender’s risk.
Less stringent credit checks: Second charge mortgage lenders may be more lenient with their credit checks than other types of lenders. This can be helpful if you have a poor credit score or other financial issues that could make it difficult to access credit through other means.
More generous income multiples and criteria: Second charge mortgage lenders may be more flexible with their income multiples and criteria than other types of lenders, allowing you to borrow a larger amount of money or meet eligibility requirements that you might not meet with other lenders.
Higher costs: Second charge mortgages may come with higher costs than other forms of borrowing, such as remortgages
Increased risk of repossession: As with any type of secured borrowing, there is a risk that your property could be repossessed if you are unable to keep up with your repayments.
Reduced equity in your property: Taking out a second charge mortgage will reduce the equity you have in your property, which could make it more difficult to access further borrowing or to sell your property in the future.
How much does a second charge mortgage cost?
The cost of a second charge mortgage will depend on a range of factors, including the amount borrowed, the interest rate, and any associated fees or charges.
In general, second charge mortgages tend to have higher interest rates than first charge mortgages, as they are considered to be a higher risk for lenders.
Alternatives to a second charge mortgage
There are several alternatives to second charge mortgages, including
- Further advance: If you already have a mortgage on your property, you may be able to borrow additional funds through a further advance. This involves borrowing more money from your existing mortgage lender and adding it to your current mortgage balance. Further advances typically have lower interest rates than second charge mortgages, but the amount you can borrow may be limited by the equity available in your property.
- Remortgage: Another alternative to a second charge mortgage is to remortgage your property. This involves switching your existing mortgage to a new lender or product, potentially allowing you to borrow additional funds at a lower interest rate. Remortgaging may also provide the opportunity to consolidate debts or secure a more favorable repayment term.
- Using savings or other funds: If you have savings or other funds available, you may be able to use these to cover the cost of your borrowing needs. This can be a cost-effective option, as you won’t need to pay any interest or fees on the borrowed amount. However, it’s important to consider the impact on your overall financial situation before using your savings, as this may leave you with less financial flexibility in the future.
- Personal loan: Another option to consider is taking out a personal loan. Personal loans typically have fixed interest rates and repayment terms, allowing you to borrow a set amount of money over a specified period of time. However, the interest rates on personal loans can be higher than those offered on mortgages, and the loan amount may be limited by your credit score and income.
How much can I borrow with a second charge mortgage?
The maximum loan-to-value (LTV) ratio allowed by the lender, you may be able to borrow a significant amount on a second charge mortgage. The amount that you can borrow is largely dependent on the equity available in your property, which is the difference between the value of the property and any outstanding mortgage balance.
Some lenders may permit borrowers to borrow up to 95% of the property’s value on a second charge mortgage. In certain cases, it may even be possible to borrow up to 100% of the property value.
However, it’s important to note that these higher LTV ratios are typically only offered by specialist lenders, and may come with higher interest rates and stricter lending criteria.
Another advantage of second charge mortgages is that affordability assessments are often more lenient compared to first charge mortgages. This means that lenders may be more flexible with their loan-to-income (LTI) multiples, with some lenders allowing up to 6 times the borrower’s income.
However, it’s worth noting that the exact LTI ratio allowed will depend on the lender and the borrower’s individual financial circumstances.
What documents do I need for a second charge mortgage?
- Proof of Identity
- Up to date mortgage statement
- 3 months bank statements Proof of income: 3 months payslips or 2 years accounts if self employed.
It’s also important to check with your existing mortgage lender that they will allow you to take a second charge mortgage.
Speak To an Expert
Whether you’ve just had an offer accepted on a property and you’re ready to go, or you’re simply wondering how much you need to save for a deposit, it’s never too soon to reach out.
Are second charge mortgages regulated?
Yes, second charge mortgages are regulated by the Financial Conduct Authority (FCA), the same regulatory body that oversees other types of mortgage lending in the UK. This means that second charge mortgage lenders must adhere to strict rules and guidelines to protect consumers and ensure fair lending practices.
Can I have more than one second charge mortgage?
It is possible to have more than one second charge mortgage on your property, but it may be more difficult to find lenders who are willing to provide this type of borrowing.
Having multiple second charge mortgages can increase your overall level of borrowing and your monthly repayments, which could make it more difficult to keep up with your repayments and increase the risk of defaulting on your loans.
How long does it take to get a second charge mortgage?
Second charge mortgages can be arranged relatively quickly compared to other types of borrowing.
In some cases, it may be possible to complete a second charge mortgage application and receive funds within just 2-3 weeks. However, the process typically takes between 4-6 weeks from application to completion.
What happens if I can’t repay my second charge mortgage?
If you are unable to repay your second charge mortgage, the lender may take legal action against you in order to recover the outstanding debt. This could include seeking a court order to repossess your property in order to sell it and recover the amount owed.
However, it is important to note that the first charge lender would have priority over the second charge lender in the event of repossession. This means that the first charge lender would be entitled to recover their debt before the second charge lender. If the sale of the property does not cover the debts owed to both lenders, then the second charge lender may not be able to recover the full amount owed.
Can I use a second charge mortgage for business purposes?
Some second charge mortgage lenders may allow you to release equity from your property for business purposes, such as to invest in your business or to fund a new venture.
However, it is important to note that this will depend on the specific lender’s criteria and they may have certain requirements that need to be met.
In general, first charge residential mortgage lenders may be more reluctant to release equity for business purposes.