A second charge mortgage, also known as a second mortgage, lets you borrow more money by using your home as security. A second mortgage can be a good way of borrowing money for home improvements – but in many cases, it’s more prudent to use a more conventional remortgage.
What is a second charge mortgage?
A normal residential mortgage, where you borrow money to buy the home that you live in, is a first charge mortgage. A second charge mortgage is another mortgage on the same property.
How does a second charge mortgage work?
A second charge mortgage is a type of secured loan. With secured loans, whatever you provide as security can be repossessed by the lender if you don’t keep up repayments.
Secured loan providers will usually be more willing to lend you a larger amount of money than with an unsecured personal loan.
Second charge mortgages are virtually identical to first charge mortgages, but instead of providing a cash deposit you instead use positive equity in your home as security. The same stringent lending criteria applies: you can’t borrow more than a certain multiplier of your income (usually no more than 4.5x), and the lender still has to perform an affordability check by looking at your finances and seeing whether you can afford the monthly repayments.
Just like a normal mortgage, a second charge mortgage can have a promotional fixed-rate or discount period, and will usually have a long term (25+ years). The interest rate will usually be higher than a first mortgage.
When you sell your house, you must pay off the first charge mortgage and then the second mortgage as well. If your home has gone down in value and you can’t pay off the second charge, you could be pursued by the lender for the shortfall.
How much can you borrow with a second mortgage?
In theory, a second charge mortgage allows you to borrow up to the amount of positive equity in your home. For example, if your home is worth £400,000, and you have a first mortgage for £250,000, then you have £150,000 in equity and may be able to borrow that amount.
In practice, most second charge mortgage lenders want some leeway, in case your property goes down in value or your circumstances change in some way. The maximum amount you can borrow will vary from product to product; speak to a mortgage broker to find out more.
The risks of a second mortgage
Taking out a second mortgage is a risky manoeuvre and you should never do it without first talking to a qualified advisor.
If you are already struggling to repay your normal mortgage, you should not get a second mortgage. You could lose your home if you fail to keep up with repayments on either mortgage.
You should also think twice before using a second mortgage to consolidate credit card debt and other unsecured loans. This might look like a sensible option in the short term, but if you get a 25-year second charge mortgage, you could end up paying a lot more interest overall. A balance transfer credit card, which can offer 0% interest on your debts for up to three years, might be a better option.
Find out more about the best options for short-term borrowing
The benefits of a second mortgage
There are some situations where a second mortgage can make sense.
If you want to raise a large amount of money, but remortgaging would incur a hefty early repayment charge, then a second charge mortgage could be the right solution. If you’re currently outside your mortgage’s promotional period, or you would only suffer a small early repayment charge, then remortgaging is almost always a better solution.
If you can’t get an unsecured loan or balance transfer card – perhaps because you’re self-employed or your credit rating isn’t good enough – then a secured loan might make sense. (But if you have time, improving your credit score could be the more sensible solution.)
In any case, if you decide to get a second mortgage, talk to your current mortgage lender first to see what they would charge for an additional loan – and make sure you talk to a broker who will find you the best deal for your personal situation.