What is a second charge mortgage?

A second mortgage is a way of borrowing money against the equity in your home.

It’s a secured loan, which means you borrow money using your home as security. 

You’ll have this second mortgage as well as your existing mortgage. And it’ll usually be with a different lender.

When you take out a second charge mortgage you’ll effectively have two separate mortgages on the same property.

How do second charge mortgages work?

A second charge mortgage works in a similar way to a normal mortgage

You borrow an amount of money and repay it in monthly instalments over a set period of time. These repayments include interest.

This set period of time is called the mortgage term.

Second charge mortgages are usually for 5 to 25 years and can be from £1,000 upwards.

You can get a second charge mortgage on a fixed or variable rate.

The difference between a home equity loan and a second mortgage

A home equity loan can be seen as a second mortgage if you already have an existing mortgage on the home.

A second charge mortgage can also be known as a:

  • secured loan

  • homeowner loan

  • home equity loan

There’s little difference between them.

But, if your home is unencumbered and you want to take out a loan secured against your home, this won’t be a second charge mortgage.

Should I get a second charge mortgage?

There are advantages and disadvantages to second charge mortgages.

Pros of second charge mortgages

  • A second charge mortgage can be cheaper than unsecured loans like credit cards.

  • You may be able to borrow more than you would with other loans.

Cons of second charge mortgages

  • Your home could be repossessed if you don’t pay your mortgage. The first charge mortgage lender gets their money before any money goes towards paying off the second charge mortgage.

  • Interest rates are higher than first charge mortgages. You may find there are cheaper ways of borrowing money.

Should I get a second mortgage or remortgage?

Remortgaging is a popular way of borrowing money against the equity in your home. 

Remortgaging to release equity means taking out a new mortgage large enough to pay off your existing mortgage and also leave you with a cash lump sum.

You can use that cash to make home improvements, for example.

Interest rates on remortgage products will generally be lower than on second charge mortgages. 

However, there are some cases where taking out a second charge mortgage might be a better option than remortgaging.

These include:

  • If you’re on a very low lifetime tracker rate on your current mortgage. 

Remortgaging would mean losing this low rate and paying more interest on a larger amount of money.

  • If you’re tied in to a fixed rate mortgage. 

You might have to pay an early repayment charge (ERC) to exit the deal early.

Can I get a second mortgage?

To get a second charge mortgage you’ll need:

  • equity in your property

  • enough income to pay both your first charge mortgage and second mortgage

  • a suitable credit rating 

The main thing you need to get a second charge mortgage is equity in your home.

You’ll have equity in your home if its value is more than your outstanding mortgage. 

For example, if your home is worth £400,000 and you owe £100,000 on your mortgage, you’ll have £300,000 in equity.

You may have equity in your home if:

  • you’ve paid off a lot of your mortgage

  • you’ve made home improvements that have boosted your home’s value

  • property prices have risen in your area

A second mortgage calculator can give you an idea of how much you might be able to borrow.

When you apply for a second charge mortgage the lender will carry out an affordability assessment to check you can afford to pay the mortgage.

An affordability assessment looks at your income and outgoings.

Your income will include:

  • your salary

  • investment income

  • money from pensions or benefits

Your outgoings will include:

  • your first mortgage

  • household bills

  • regular spending

  • any other debt repayments

Your credit score is less important for a second charge mortgage than it is for a first charge mortgage.

In some cases you may still be able to get a second mortgage with a bad credit score. 

However, this can vary from lender to lender.

Who does second mortgages?

Second charge mortgages are usually offered by specialist lenders via mortgage brokers.

Specialist lenders offer mortgages to those that might not meet most lenders’ criteria. 

For example, if you have bad credit or are self employed you might want to consider a specialist lender.

Specialist lenders that offer second charge mortgages include:

  • Paragon Bank

  • United Trust Bank

  • Prestige Finance

  • Masthaven Bank

  • Together

  • Shawbrook Bank

How to get the best second mortgage rates

The more equity you have in your property, the better the deals available to you.

When you take out a second charge loan, the total debt on your existing mortgage and the second charge mortgage can’t be above a stated maximum loan to value (LTV). 

The best rates available are usually up to a total LTV of 65% or 70%. 

Second mortgage rates vary between lenders and second charge mortgage products. 

A mortgage broker can help you shop around and they may have access to second charge mortgages not available directly from a lender.

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Your home could be repossessed if you don't keep up repayments on your mortgage.

You may have to pay an early repayment charge to your existing lender if you remortgage.

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