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Second charge mortgages

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Second charge mortgages

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Last reviewed on 25th July 2022

A second charge mortgage can allow you to raise capital instead of a remortgage but you’ll still need to understand how they work before you make any commitments.

Financial decisions shouldn’t be taken lightly. Taking on a second 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 to buy a second property, you can read our article on second home mortgages.

What is a second charge mortgage?

A second charge is a loan that is secured against your home for security, very much like your existing mortgage. The loan is completely separate from your existing mortgage but can allow you to release equity in your home. That being said, you will have to repay this in addition to your existing mortgage.

Why might I need a second charge?

Second mortgages are typically used for home improvements, but can be used for the following situations:

  • A remortgage is too expensive
  • You want to keep your existing mortgage deal
  • You’ve had bad credit since your first mortgage
  • Avoid early repayment charges
  • 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

How does a second charge mortgage work?

If you don’t have equity in your property, then getting a secured charge won’t be possible. Furthermore, you’ll have to be a homeowner to be eligible. You don’t need to live in the property you own but 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 loans against anything. If you own a property outright and have no mortgage, it’s classed as unencumbered. 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 loan.

Can I get a second charge?

To get a second charge, you must have equity in your property. Most lenders will require a minimum of 15% equity before approving an application. As an example, if your house is worth £100k and you have £85k left to pay your lender, you’d have 15% in equity.

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 read our article on second charge buy to let loans if you’re a landlord looking to withdraw equity.

How much can I borrow on a second charge mortgage?

The amount you can borrow from a second charge 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.

Can I borrow 100% of my equity?

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.

This will then give lenders an indication of whether the loan is affordable. You’ll also undergo a credit check. Having bad credit can have a negative effect on the amount you can borrow. If your credit is really bad, you 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.

ask a mortgage broker

Should I remortgage or get a second charge?

A second charge can be a great alternative to a remortgage. In comparison, there are times when a remortgage may be more suitable. If you need less than £10k, a personal loan may be more viable than getting a second charge or a remortgage.

Before you make your decision, consult an expert for more information on what to do next. We also have 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

Secured loans can be useful when the rates you’re offered for a remortgage are too high. If you’ve had bad credit or are self-employed for instance, lenders will classify you as a high-risk borrower. As a result, the rates on offer are likely to be less than desirable. Personal loans can also be hard to come by under these circumstances, so a second charge may be your only option.

A secured loan can allow you to pay a higher rate of interest on a smaller loan amount. Furthermore, you may already have an excellent mortgage deal and simply don’t want to disturb it.

If you want to release equity with a remortgage but have a high early repayment charge, it may be cheaper to take a secured loan. Our advisors can take a look at your mortgage and calculate the cheapest option possible. Many second charge lenders offer long-term loans which can allow you 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 often used a lot more in comparison to second charge loans. Nonetheless, the market for secured loans is growing rapidly. There are times when a remortgage would be better suited, but it all depends on your circumstances.

If you’re struggling financially, 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 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 mortgage 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.

If you hope to move home in the future, 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, it was possible 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 viable. 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.

Applying for a secured loan directly with a lender could result in you taking a loan that isn’t suited to your needs. Furthermore, an advisor can find you the most competitive deals 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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About the author

Mortgage Advisor | More Articles

Martin is a senior mortgage advisor and has held a CeMAP qualification for over 15 years while also completing an MBA in Global Banking & Finance.