Looking for some money to make home improvements? Or perhaps you just need extra cash to fund a project or consolidate debt? Paul Stringer of Norton Finance explains how a second charge mortgage could help
What is a second charge mortgage?
A second charge mortgage works in a similar way to a secured loan, taken against a home. By releasing equity in a property as money, you are in effect taking out a second mortgage on a home.
Funds of over £1,000 can be released in this way but be aware that you will have to pay back the borrowed amount, as well as your current mortgage arrangement.
A second charge mortgage allows you to borrow a small amount that can be paid off in due course.
To get a second charge mortgage you must already be a homeowner, however you do not need to live in the property, you could be a landlord.
In a second charge mortgage agreement your home acts as the collateral. Therefore, you could lose your home if you fail to pay back the value of your second charge mortgage.
Homeowners may choose to do this to undertake major home improvements or perhaps a change in their personal financial circumstances prevents them from remortgaging to access this extra cash.
When you apply for a second-charge mortgage, there are a series of hoops you will need to jump through before you can secure the loan.
You’ll have to undergo credit checks, stress-testing and property valuation to reassure the lender that you’ll be able to pay back the loan and to work out how much equity in your property you currently own.
Is a second charge mortgage right for me?
If you are a homeowner then there are a few reasons as to why a second charge mortgage might be right for you.
For example, if you have a low credit rating or are self-employed you might find it hard to get an unsecured loan. In this instance a second charge mortgage could help, and let you access the funds you need at a lower interest rate as your home will be used a security.
Even those who don’t fall into the previous categories can apply and benefit from low interest rates of 3.37% which is lower than most unsecured loan rates. Note, whatever your situation is, you will still need to be in a position to afford the monthly repayments.
When a person chooses to remortgage, there can be charges that are associated with doing this, such as early repayment fees.
This is where you must pay your old lender for a portion of the interest they will lose out on. If you are faced with hefty fees, a second charge mortgage could be an option to save you money.
A second charge mortgage can sometimes be cheaper than remortgaging as you won’t pay any exit fees or early repayment charges.
Remember, you’ll still owe your current mortgage total and you’ll also need to pay off the second charge mortgage fully should you decide to move to a new property. Both your first and second mortgage will need to be cleared before any home sale. This could leave you with a deposit that is smaller than you might need or like.
What if I have a low credit rating?
If you have a low credit rating you may not wish to remortgage as this could mean you could pay a higher interest rate on any new arrangement. However, a second charge mortgage works as a separate loan alongside your initial repayment schedule therefore it might suit you better.
However, second charge mortgages won’t be the right choice for everyone. Remember you still owe your current mortgage total if you get a second charge mortgage and you’ll need to pay off both if you decide to move to a new home.
Also, as your home is collateral, you could lose it to repossession if you fall behind on repayments, so consider if you can afford the repayments. It is also worth noting you may pay higher interest rates on a second charge mortgage.
In order to secure a second charge mortgage, you will need to prove you will be able to make the repayments on both mortgages. As with making any big financial decision it is always best to speak to a professional first.
Paul Stringer is director of the Norton Finance Group, Norton Finance
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We have teamed up with Loans Warehouse, the UK’s leading second mortgage broker, to help you find the best secured loan deal.
To view the Best Buy Second Mortgages currently available click here.
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