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Ask the Expert: Second Charge Mortgages

Also known as secured loans, second charge mortgages are quickly becoming part of mainstream lending, as more homeowners than ever before look for an alternative to remortgaging or taking out a personal loan. A second charge mortgage uses the borrower’s home as security, helping them to raise funds against their property for a wide range of purposes. They are often used to raise additional funding when a homeowner’s existing lender will not, or cannot, release any additional funds.

From raising funds for home improvements, or for the purpose of buying a new vehicle through to paying for a wedding, injecting cash into a business, paying a tax bill or even funding cosmetic surgery, there are a huge amount of reasons why people decide to take out second charge mortgages.

Allowing homeowners to retain their current mortgage at a competitive interest rate, a second charge mortgage is widely associated as being the best option for those that have high early repayment charges on their existing mortgage, recently become contractors or self-employed and would need to raise funds quickly, property owners with a poor credit rating, as well as those looking to raise capital against their UK property in order to purchase premises abroad.

Second charge mortgages still need to be repaid alongside your first mortgage and if your home is repossessed, lenders will recover funds in order of their charge. Just like with any mortgage, failing to repay it could mean you’ll lose your home.

To dig deeper into second charge mortgages, we’ve asked one of our experts, Second Charge Consultant Tammy Chalk, to answer a few burning questions around second charge mortgages, and shine a little light on how these mortgages work and why they can be a good option to go for.

Why Would You Get A Second Charge Mortgage?

There are a number of reasons to apply for a second charge mortgage and they include;

  • Debt Consolidation
  • Home improvements/extensions
  • Helping with University fees
  • Helping your family with a deposit for their first home
  • Buy-to-let property purchase
  • Children’s tuition fees
  • Payment of a tax bill
  • Transfer of equity
  • Lease extension

Who Can Apply For A Second Charge Mortgage?

A second charge mortgage is open to a variety of borrowers including contractors, freelancers and self-employed professionals but there are stipulations. Firstly, and most importantly you must have an existing first charge mortgage on a property already. You must also be 18 years old and over, as well as being employed (be it in a contract or permanent work).

How Do I Apply For A Second Charge Mortgage?

The second charge loan application process is similar to applying for a re-mortgage.  A broker who specialises in offering second charge products will be able to gain access to a panel of lenders to ensure the quote you get is competitive and applicable to your particular set of circumstances.  Most second charge lenders only accept business through a registered Broker and in nearly all instances, the client does not need to instruct a Solicitor to act for them; which can help expedite the transaction. This is different to remortgage applications where a conveyancer/Solicitor is usually required.

What Documents Are Required?

Documents vary from lender to lender.  The typical documents required to assess your eligibility are a copy of your credit report, proof of income for e.g. a copy of your contract if you are a contractor, HMRC documentation if you are self-employed and payslips if you are PAYE.  If you are consolidating unsecured credit, you will also be asked to provide a list of the credit you wish to clear.  It is best to have these prepared when you go into your initial discussion.  When a loan recommendation is made to you, the lender will then ask for some additional documentation such as bank statements and their own lender specific documents such as application form, DDM etc.

How Much Am I Able To Borrow?

How much you can borrow depends on the existing equity in your home, which in simple terms is the percentage of your property that is owned outright by you.

You can calculate this by establishing the value of mortgage owed on your property against the value of the home. For example, if you bought a house for £300,000 and you have £250,000 left to pay on the mortgage, then you have £50,000 equity – this can change in response to changing property demands, especially if your property increases in value.

Opting for a second charge mortgage/secured loan will allow you to access an approved loan secured against the equity in your property. This means you will then be able to apply for a second charge, which is subject to underwriting and valuation by the lender.

In the majority of cases, homeowners that choose a second charge mortgage/secured loan as an alternative method of raising funds tend to borrow anything between £30,000 to £80,000. The more equity you have in your property, the more money you are likely to be able to borrow. All cases are reviewed on a case-by-case basis.

All loans are also subject to affordability calculations and credit status. 

What Are The Pros And Cons Of A Second Charge Mortgage?

A second charge mortgage is simply another name for a homeowner loan.  It is a loan that is secured to your property.  If you stop making your repayments, the lender has the right to repossess the property from you in order to get back what they owe.  This is worst case scenario, but it works in the same way as your main mortgage.  On the plus side, because the loan is secured against your home, it is often possible to borrow more than you could with a personal loan.  Plus, you can spread your repayments over a longer term to make them more affordable.  Lenders will also lend for pretty much any legal purpose, so they are more flexible in terms of what you are using the money for.

What Are The Alternatives?

A second charge mortgage isn’t for everyone and there are alternatives such as re-mortgage, further advance and personal loans.

It’s always best to speak with a specialist before applying for any type of mortgage to make sure you understand the process and what’s involved, you should also make sure that the mortgage or loan you’re applying for is the one that suits you best and that you are able to afford it.

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