A guide to second charge mortgages

More and more people are taking out second charge mortgages instead of a personal loan or remortgaging. We explain what they are and how they might help you

What is a second charge mortgage?

Second charge mortgages are becoming increasingly popular, with the number of people opting for one at its highest level since 2008.

They allow you to borrow a lump sum which you repay alongside your existing mortgage over a fixed term.

Many people use them to raise money as an alternative to a remortgage.

Second charge mortgages are also referred to as secured loans. This is because the loan is secured on the property, so if you can’t repay the loan the lender has the right to take the property from you.

First charge mortgages are also secured loans for exactly the same reason – it’s just that they are traditionally referred to as a mortgage.

What can I use a second charge mortgage for?

You can use a second charge mortgage for a number of purposes without affecting your normal mortgage.

A second charge mortgage is extremely helpful if you are struggling to get a personal loan, maybe because you are self-employed.

If you are looking to remortgage a second charge mortgage might be cheaper if your mortgage has a high early repayment charge, or you have a particular product you don’t want to lose (fixed rate, discounted rate etc.).

Lots of people also use them to fund home improvements and add value to their property.

You can even use one to raise a deposit on a son or daughter’s first home or for a second property, such as a buy-to-let investment.

The list is endless.

How do you qualify?

To qualify for a second charge mortgage you must be a home owner, although you don’t necessarily have to be living there.

While a first charge mortgage is based on a number of factors, including your deposit, credit score and ability to pay each month, a second charge mortgage is based on the equity available in your property.

This is the percentage of your home owned outright by you. You can work this out by calculating the amount you owe on your property against the value of it. So, if your property is worth £300,000 and you still have to pay off £250,000 on your mortgage, you have £50,000 in equity.

You don’t need to have a high credit rating, in fact you might even be able to get one with a low score. This is because lenders look more favourably on borrowers with a poor credit rating if they are prepared to borrow against their home.

The typical minimum term is three years and the maximum is 30 years and they can be paid off alongside your existing mortgage.

You can borrow from £1,000 upwards and the greater the equity in your property, the more you will be able to secure.

Are interest rates higher?

Interest rates on a second charge mortgage are often lower than a personal loan as the loan is secured against the value of a property and therefore the lender could recoup the money through repossession.

The rate will also be influenced by the length and amount of the second charge mortgage as well as the amount of equity in the home.

What are the main advantages of second charge mortgages?

One of the main benefits of second charge mortgages is their flexibility. They are available for terms of up to 30 years and can run in line with the term of a first charge mortgage.

Taking out a second charge mortgage will allow you to borrow over a longer period of time, helping to make your monthly payments more affordable. However, this could mean you pay more in interest over the long term.

People who have been locked out of the mortgage market because of their age can also benefit from second charge mortgages.

The tightening of lending criteria following the Mortgage Market Review means many people over 40 have difficulty getting a remortgage as the term will take them into retirement.

Self-employed people can sometimes have difficulties getting a personal loan, so by taking out a second charge mortgage you can borrow money by using your property as security.

Another great thing about second charge mortgages is that you can complete from start to finish within as little as two weeks, compared to a remortgage which can take far longer.

If you are looking to pay off your second charge mortgage early you may also overpay, although this will depend on the terms and conditions of your mortgage and you might be liable to a penalty.

What are the main disadvantages?

The extra loan is linked to your property, so if you fail to keep up payments you could lose your home.

You could also end up paying more in the longer term even though the interest rates are lower than on many personal loans.

Second charge loans are also charged at a higher interest rate than a normal mortgage as the lender is taking a higher risk.

Although they are often cheaper than unsecured personal loans, you could end up paying more in interest if your credit rating is not very good.

If you have got lots of debts that you want to clear up, such as credit cards or bank loans, you could use a second charge mortgage to help pay off what you have borrowed at a cheaper rate.

However, while a second charge mortgage might be a good way of consolidating debt, be warned – you could end up paying more in the long term as a second charge mortgage can run for 30 years.

You also need to make sure that you have cleared your second charge mortgage if you are selling your house. If not, you might not be able to move.

When you sell your home, the first charge mortgage will also need to be cleared before any money goes towards paying the second charge loan.

Second charge loan or remortgage?

If your mortgage has a high early repayment charge it might be cheaper to take out a second charge mortgage than to remortgage.

The Government’s Money Advice Service website gives the example of John and Claire, who have a £200,000 five-year fixed rate mortgage with three years left to run until the deal ends.

Since they took out a mortgage the value of their home has risen.

They want to borrow £25,000 to refurbish their home, but if they remortgage they will have to pay a £10,000 penalty and there’s no guarantee that they’ll be able to get a better interest rate than the one they are currently paying – in fact they could even end up paying more.

If they take out a second charge mortgage, they will pay a higher interest rate on the £25,000 than they pay on their first mortgage, plus fees for arranging the second charge mortgage.

However, this will be far less than paying the £10,000 early repayment charge and possibly a higher interest rate on their first mortgage.

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