Second charge and second mortgages

A second charge mortgage – also simply 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 may be more prudent to use a conventional remortgage.

What is a second charge mortgage?

A normal residential mortgage, where you borrow money to buy the home you live in, is a ‘first charge mortgage’. A second charge mortgage is an additional 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 do not keep up repayments.

Secured loan providers tend to be more willing to lend you a larger amount of money than with an unsecured personal loan, though you can borrow as little as £1,000 with a second mortgage.

Second charge mortgages are virtually identical to first charge mortgages, but instead of providing a cash deposit you use the positive equity you have in your home as security.

The same stringent lending criteria applies: you cannot borrow more than a certain multiplier of your income and the lender still has to perform an affordability check by looking at your finances and seeing whether you can afford the monthly repayments. In the case of a second charge mortgage, you would need to be able to meet the repayments on top of your first charge monthly repayments.

Just as with a normal mortgage, a second charge mortgage can have a promotional fixed rate or discount period, and will usually have a term of 25 years or more. The interest rate is usually higher than on a first mortgage.

When you sell your house, you must pay off the first charge mortgage before the second mortgage, which could be transferred to a new mortgage.

If your home has gone down in value and you cannot pay off the second charge, the lender can pursue you for the shortfall.

How much can you borrow with a second charge mortgage?

In theory, a second charge mortgage allows you to borrow up to the amount of positive equity you have 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, which is the maximum amount you would be able to borrow.

What are the risks of a second charge mortgage?

Taking out a second mortgage on your property is a risky manoeuvre and you should never do it without first taking advice.

If you are already struggling to repay your mortgage, don’t think that taking out a second mortgage will help you with the cashflow you need to meet your commitments. Your monthly repayments will be higher once you have two mortgages, and you could soon find yourself back in the same position but with increased monthly repayments to make. 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 or 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 0% balance transfer credit card might be a better option.

What are the benefits of a second mortgage?

There are some situations where a second mortgage might make sense though.

If you want to raise a large amount of money but doing so via remortgaging would see you hit with a hefty early repayment charge (ERC), a second charge mortgage could be the right solution. However, if you’re currently outside your mortgage’s promotional period or you would pay only a small ERC by switching, remortgaging is likely to be a better solution.

A second charge might make sense if you cannot get an unsecured loan or 0% balance transfer card because, say, you’re self-employed or your credit rating is not good enough. That said, if you do not need the money from a remortgage quickly, it could be more sensible for you to improve your credit score, which could make remortgaging easier later down the line.

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 help find you the best deal for your personal situation.

17th June 2020