A second charge mortgage can be a great alternative to a remortgage. With many changes in the property market, not everyone is able to or wants to remortgage. As a result, a second charge can allow you to raise capital where you otherwise wouldn’t be able to.
Second charge mortgages are typically used in the following situations:
- If a remortgage is more expensive
- You may want to keep your original mortgage deal
- If you’ve had bad credit since your first mortgage
- You have an early repayment charge you want to avoid
- Unable to get an unsecured personal loan
- You don’t want to extend your mortgage term
- Your current lender won’t allow you to release equity
- You need to raise finance fast
Financial decisions shouldn’t be taken lightly. Taking on a second charge loan in addition to your original mortgage will mean an increase in monthly repayments. As a result, lenders will assess your affordability to ensure the loan is affordable.
If you’re not looking to release equity, but want a second mortgage for a second property, you can read our article on second home mortgages.
Find out if you’re eligible for a second charge below. Our advisors specialise in second charge mortgages and are available to answer any questions. You can also make an enquiry to get started.Enquire Now
What is a second charge mortgage?
A second charge mortgage is simply a second mortgage in the form of a secured loan. The loan is secured against your home as security, very much like your first mortgage. If you don’t have equity in your property, then getting a secured loan isn’t possible.
Second charge loans can only be taken out by homeowners. You don’t need to live in the property you own, however you’ll need to own a property so that lenders can use it as security. If you don’t own a property, you won’t have any security to offer. As a result, lenders won’t be able to secure their loan against anything.
If you own a property outright and have no mortgage, it’s classed as unencumbered. Getting a second mortgage on an unencumbered property isn’t possible, as you don’t yet have a mortgage. You’d first need a mortgage before getting a second one. In cases such as these, you’d need to remortgage your unencumbered home before applying for a second charge loan.
Lenders who have secured the first charge will always be paid prior to second charge lenders. Second charge lenders then receive any remaining funds. If there is a shortfall, the second lender is likely to pursue you for the debt.
How to get a second charge mortgage
To get a second charge, you must have equity in your property. The majority of lenders will typically look for a minimum of 15% equity before approving an application. If your house is worth £100k and you have £85k left to pay your lender, you’d have 15% in equity.
You can often get free valuations from local estate agents for an accurate value of your home. Once you have this, you can calculate how much equity you have and whether you’ll be able to get a second charge loan. Simply deduct your mortgage balance from the value of your home to calculate how much equity you have.
Second charge mortgage lenders can offer more flexibility than regular lenders. That being said, you’ll still need to meet the criteria for the loan. Lenders will assess your income, credit report and the property itself as suitable security.
You can also read our article on second charge buy to let loans if you’re a landlord looking to withdraw equity.
How much can I borrow from a second charge loan?
The amount you can borrow from a second charge loan depends on various factors such as:
- The amount of equity you have in your property
- Your income/affordability
- Outstanding loans you already have
- Your credit history
The largest factor in the amount you can borrow is the amount of equity in your property. For instance, if you have £50k equity, the maximum you would be able to borrow is £50k. This figure can be reduced depending on other factors during your assessment, such as affordability and your credit check.
If you wanted to apply for 100% of the equity you have, it will largely depend on whether the loan is affordable. Many lenders will use income multipliers of around three or four times your income. They’ll then assess your expenditure to calculate the amount of disposable income you have each month. Based on this amount, they’ll then decide whether the loan is affordable.
You’ll also undergo a credit check. Having bad credit may have a negative effect on the amount you can borrow. If your credit is really bad, you could risk being declined.
Learn more: How to get a secured loan with bad credit.
Second charge loans typically start at a minimum of £10k. Some lenders may offer less if needed, although your loan may be subject to higher fees. If you’d like to know the exact amount you’ll be able to borrow, you can speak to our advisors.
Should I remortgage or get a second charge?
A second charge can be a great alternative to a remortgage. On the other hand, there are times when a remortgage may be more suitable. If you need less than £10k, a personal unsecured loan may be more viable than getting a second charge or a remortgage. No situation is the same, so there isn’t one answer that will apply to everyone.
Before you make your decision, consult an expert for more information on what to do next. We’ve also written an entire guide on whether you should remortgage or use a secured loan, which should give you a better understanding of the options available.
When to use a second charge instead of a remortgage
Second charge loans can be useful for when the rates you’re offered for a remortgage are high. If you’ve had bad credit or are self-employed for instance, lenders will often classify you as a high-risk borrower. As a result, the rates on offer are less than desirable. Personal loans can also be hard to come by under these circumstances, so a second charge loan may be your only option.
A secured loan can allow you to pay a higher rate of interest on a smaller loan amount. Why pay interest on a £100k remortgage, when you can pay a similar interest rate on £50k in the form of a second mortgage? Furthermore, you may already have an excellent mortgage deal and simply don’t want to disturb it.
If you’re looking to release equity, but have a high early repayment charge, it may be cheaper to take a second charge. The details of any early repayment charges will be in your Key Facts Illustration (KFI). You would have received this towards the beginning of your mortgage application. Our advisors can also take a look at your mortgage and calculate the cheapest option possible.
Many second charge lenders allow borrowers to take long term loans. This can allow borrowers to keep monthly payments to a minimum. That said, you’re likely to pay more interest over a longer period of time.
When to remortgage instead of getting a second charge
Remortgages are used a lot more in comparison to second charges. That said, the market for second charge loans is growing rapidly. There are times where a remortgage would be better suited, however it all depends on your circumstances.
If you’re financially strapped, taking on a second mortgage perhaps isn’t the best option. This is because if you’re already struggling to pay one mortgage, taking on another mortgage will make things even more difficult.
Borrowers often release equity for debt consolidation. Using a second charge loan to do this is very high risk and often not recommended. This is because you’re converting unsecured debt into secured debt. Furthermore, you’re using your home as security.
If you have no early repayment charge, you could explore what rates are on offer. Your lender may also allow you to take a further advance. If you’re offered rates that suit your budget, a remortgage may be more practical.
You may have planned to move home in the future. If so, a remortgage could be a better option. This is because you’ll have to pay both your first and second lender once you’ve sold your property. Paying two lenders from the proceeds of selling may not leave enough for a deposit to buy your next home.
Second charge mortgage brokers
Second charge loans are subject to FCA regulations, which is good news for borrowers. Prior to this, people were able to take secured loans without caution which led to many homes being repossessed.
Speaking to an expert can give you a better understanding of whether a second charge mortgage is a viable option. The financial market is packed full of a variety of products, so it makes sense to consult a specialist who is qualified in this area.
Getting a second mortgage yourself could result in you taking a loan that isn’t suited to your needs. Furthermore, an advisor can find the most competitive deal available. It’s useful to compare key details such as fees, early repayment charges and rates, which is what advisors do on a daily basis.
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