How a second charge mortgage could help if you need some cash
If you need to free up some cash you might want to consider a second charge mortgage.
As the name suggests, you take out a second mortgage on your home and effectively have two different home loans running at the same time.
Second charge mortgages are becoming increasingly popular. More than 13,300 were taken out in the first half of 2019, making it the strongest first half-year performance in more than ten years, according to the Finance & Leasing Association. (1)
In the 12 months to the end of June 2019 the number taken out jumped by 17% and the value of those loans increased by 14%, the same research found.
Why might you want a second charge mortgage?
Second charge deals are becoming more attractive because many homeowners are choosing to stay and improve their current home rather than move to a new one.
So if you want to build an extension for example, and need to borrow the cash to do it, then a second charge mortgage might be a useful way to do that.
This is particularly the case if you don’t want to change your existing mortgage.
There are plenty of other reasons you might want to go for a second charge mortgage too.
You might want to raise cash to use as a deposit on another property, such as an investment for yourself or to help one of your children get on to the housing ladder.
You could do this by remortgaging too, of course. But you might have a great low rate on your current mortgage and remortgaging would mean not only increasing the size of that debt, but also moving to a higher rate.
A second charge mortgage might be an option if your current lender won’t let you increase the size of your existing loan, or if you’d need to pay an early repayment charge on the first mortgage.
As with a normal mortgage, the rate you pay will vary depending on how the size of the loan compares to the overall value of the property (known as the loan-to-value or LTV).
Is this the same as a second mortgage?
No. A second mortgage is something you might take out if you want to buy a second home. This could be a holiday home for you and your family or a buy-to-let investment.
The type of mortgage you’ll need will vary depending on what you want to use the second home for.
If you’re investing in something that you want to let out, perhaps as a way of supplementing your pension savings, then you’ll need to take out a buy-to-let mortgage.
However, if it’s a home that you don’t intend to let out then a straightforward residential mortgage will do the job.
Are second charge mortgages a good idea?
“Second charge mortgages can help in a host of different situations if you need to borrow, but either can’t or don’t want to change your main mortgage,” said Prakash Patel, a Mortgage Adviser at Trussle.
“However, it’s really important that you go through the sums to make sure you can comfortably cover the cost of two sets of mortgage repayments each month.
“As with a normal mortgage, if you fail to keep up with your repayments then your home could be repossessed. If you had to sell the property in order to clear your debts, the normal mortgage would need to be paid off in full first too.”