What is a second charge mortgage?

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.

Our mortgage expert Tammy Chalk answers your questions and explains the pros and cons to see if a second charge mortgage could work for you…

Why would I get a second charge mortgage?

A second charge mortgage basically allows you to secure additional funding by means of a secured loan, using your home as security. There are a number of reasons you may wish to apply for a second charge mortgage, the most common of which are;

• Investing in a company start up or injecting additional funds into an own business
• Paying a tax bill
• Debt Consolidation
• Home improvements/extensions
• Helping with University fees or children’s tuition fees
• Helping a family member with a deposit for their first home
• Buy-to-let property purchase
• Lease extension

Is a second charge mortgage right for me?

Before applying for a second charge mortgage, it’s important to do your research to decide if this is the best option for you.

Firstly – and most importantly – you must have an existing first charge mortgage on a property. You must also be 18 years old and over, as well as being employed (be it in a contract or permanent work).

Typically, a second charge mortgage would be an option if you’re not able to secure additional funds via re-mortgaging.  This could be due to adverse credit, for example, limited company accounts history or simply that your existing mortgage has early repayment charges that you want to avoid paying. In this scenario, a second charge mortgage could offer a viable means of securing a loan without the need to change or impact your existing mortgage – the two simply sit side by side.  

How much could I borrow?

Because it is a ‘secured’ loan, the amount you can borrow can, in theory, be much higher than that of an ‘unsecured’ loan, such as a bank loan.

But how much you can borrow depends on the existing equity in your home, which in simple terms is the percentage of your property you own outright.

You can calculate this by looking at the value of the 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 equity combined with other factors such as income, financial status etc. will determine what you can borrow as a second charge mortgage. 

*this can change in response to changing property demands, especially if your property increases in value.

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’re likely to be able to borrow. All cases are reviewed on a case-by-case basis.

How do I apply for a second charge mortgage?

The second charge loan application process is similar to applying for a remortgage in terms of information required.  However, a key difference is that, unlike a standard remortgage lender, most second charge lenders only accept business through a registered broker, which means that some second charge deals will not be readily available on the high street.

Using a broker not only means you get the right advice from the outset but also ensures that you get the most competitive and suitable option for your specific circumstances.

So… what are the pros and cons of a second charge mortgage?

A second charge mortgage is simply another name for a homeowner loan. It’s a loan that’s secured to your property.  Remember that if you stop making your repayments, the lender has the right to repossess the property in order to get back what they owe.  This is obviously the worst case scenario, but it works in the same way as your main mortgage.

Note that the interest rate payable on a second charge loan will be higher than your first charge or primary mortgage. If you want to consolidate debts using a second charge mortgage to pay off smaller debts such as credit cards or small unsecured loans, this will mean you might end up paying more interest in the long term.

However, 0n the plus side, because the loan is secured against your home, it’s often possible to borrow more than you could with a personal loan.  And in nearly all instances, the borrower does not need to instruct a solicitor (in contrast to a remortgage application) which helps expedite the transaction – handy if you need the money in a hurry.

Second Charge Mortgage lenders usually lend for pretty much any legal purpose, so they are more flexible in terms of what you’re using the money for than a re-mortgage lender might be.

Also, you can usually spread your repayments over a longer term to make them more affordable. 

But don’t forget: a second charge mortgage isn’t for everyone and you should fully explore the alternatives such as re-mortgaging, getting a further advance or a personal loan.

It’s always best to speak with a specialist, such as CMME, 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 one that suits your circumstances and that you’re able to afford it.

To find out more, speak to one of our experts on 01489 555 080, reference ClearScore

Find out whether a second charge mortgage is for you.

• CMME has helped 100,000 independent professionals
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A short, free consultation with one of our Second Charge Mortgage Experts will ensure you get a tailored quote. Complete the form below or call 01489 555 080, reference “ClearScore”