Second Charge Mortgages

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What is a second charge mortgage?

A second charge mortgage is a type of secured loan designed for homeowners who still have a mortgage but want to borrow more using the equity in their property as security. It can provide a way to raise funds for various purposes, including home improvements, but means that you’ll effectively have two mortgages to pay at the same time. A second charge mortgage will come from a different lender to the one that is behind the original mortgage on your property.

Second charge mortgages are also sometimes referred to as a homeowner loan or second mortgage. The latter can sometimes lead to confusion, as a second mortgage might also be a term used when getting another mortgage to buy a second property.

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First charge vs. second charge mortgages

A first charge mortgage refers to the standard mortgage that you take out to help you buy a home. It is the principal loan secured against your property, meaning the lender you take it from has the first legal ‘charge’ against your home, and must be repaid first if you sell up or don’t keep up with your mortgage payments.

By comparison, a second charge mortgage allows you to use the value you have stored in your home – your house equity – to borrow additional funds that can be used for any purpose. It will be from a different lender to your first mortgage, and each loan is treated as completely separate from one another. However, both lenders will need to agree to you being allowed to take out a second mortgage.

How do second charge mortgages work?

Second charge mortgages are very similar to standard mortgages in how they work. The funds that you borrow through a second charge mortgage must be paid back in line with the mortgage term that you agree with the lender when taking the loan out – perhaps for anywhere up to 35 or 40 years.

You’ll make repayments each month until the loan, plus the interest that you’re charged, is paid off. Crucially, with your property being used as security for the loan, there is a chance you could lose your home if you fail to keep up with your repayments. As the lender behind your first mortgage gets precedence if payments aren’t made, second charge lenders could potentially explore other avenues to recoup what they are owed if there isn’t enough value in your home to cover everything.

How much can I borrow on a second charge mortgage?

The amount you can borrow will depend on the value of the equity you own in your home – this is the overall value of your property minus your outstanding mortgage balance – and how much a lender decides is affordable for you to pay back. This means your wider financial circumstances, income and credit score are important too.

Exactly how the calculations are made can differ between lenders, but it will often be capped at around 75%-85% of the equity you have available. Minimum loan amounts tend to start around £5,000 or £10,000, while maximum amounts can be as much as £1 million or sometimes higher.

How much will a second mortgage cost?

The interest rate you’re offered will depend on your circumstances, but generally second charge mortgage rates are slightly higher than on traditional mortgages. This is because second charge lenders need to price in the risk of being behind first charge lenders in terms of priority if you fall behind with your repayments and your property needs to be sold to pay back what you owe.

Second charge mortgage pros and cons

There can be certain advantages to second charge mortgages but potential drawbacks to consider too.

Pros

Some of the main benefits of a second charge mortgage include:

It allows you to stay on your existing mortgage deal, which could be preferable if mortgage rates have increased or your credit score has deteriorated.
You won’t need to pay any early repayment charges as you won’t be switching your current mortgage deal.
It doesn’t involve extending the term of your current mortgage.
The security you’re offering the lender by way of the equity you own in your home means you might be able to borrow more than through an unsecured loan.
If you’re self-employed or have poor credit, it can be easier to get accepted for a second mortgage than for an unsecured loan.

Cons

The potential disadvantages of a second mortgage include:

You need permission from your existing mortgage lender to get a second mortgage.
Second charge mortgage interest rates are usually higher than on first mortgages.
You’ll effectively have two mortgages to pay at the same time.
You risk losing your home if you fail to keep up the repayments on either your initial mortgage or your second mortgage.
Second charge lenders can pursue you for the money they are owed if you fall into difficulties and the sale of your home doesn’t cover both your original and second mortgages.
You’ll have to clear both mortgages if you want to sell your house, which could limit your deposit for a new property – unless your lender agrees to transfer your second mortgage to your new home.
Second mortgages can have early repayment charges and other fees, similar to traditional mortgages.

How can the funds from a second charge mortgage be used?

You may want to use the money raised through a second charge mortgage for many purposes including to:

pay for home improvements
consolidate existing debts
cover school fees, a new car, a tax bill or to help family and friends
raise a deposit to buy another property, such as a buy-to-let property
extend a lease.

When might you need a second charge mortgage?

A second charge mortgage may be worth considering if you:

can’t secure a further advance from your current mortgage
are finding it difficult to get an unsecured loan
can’t or don’t want to change your existing mortgage
have a poor credit score, which might stop you getting a good remortgage deal
don’t want to pay the early repayment charge to switch from your current mortgage.

When might a second charge mortgage be a bad idea?

Taking a second mortgage isn’t likely to be a good option if you’re already struggling to keep up with the repayments on your first mortgage. If you think your finances will become too stretched in having to make repayments on a second mortgage alongside your first, it’s almost certainly a bad idea.

It’s vital to work out whether you think it’s affordable and you really need the loan. Think carefully about the risk that you could lose your home if you can’t keep up with the repayments on both mortgages as well.

Talking to a mortgage adviser is a sensible way to help you evaluate your options and reach the correct decision.

Can I get a second charge mortgage?

The basic criteria for getting a second charge mortgage is that you are a homeowner and have a certain amount of equity in your home. Whether a lender is willing to offer you a second charge mortgage will then depend on your personal circumstances and wider financial situation.

Ultimately they must determine whether you can afford to repay the loan. This involves evaluating your income against your outgoings, including your existing mortgage repayments, as well as other loan commitments you might have.

Your credit score, the value of your home, whether it will be easy to sell, and how long you’ve lived there are often important too.

The lender behind your first mortgage will also need to be satisfied that you can afford to take a second charge mortgage, and grant permission for you to have one.

How to apply for a second charge mortgage

The process of how to apply for a second charge mortgage is likely to differ between brokers and lenders but, as a general guide, you might expect the following steps:

Initial contact: When you first get in touch, you’re likely to be offered the chance to talk to a financial adviser to discuss your needs. It’s best to have some basic personal information to hand and be ready to share details about your financial situation, current mortgage, the amount you wish to borrow and for how long, and your plans for using the funds. This will help the adviser to come up with a suitable recommendation for you.
Decision in principle: If you wish to proceed, the next step is waiting for a decision in principle (DIP) from your lender. This is a promise that you can have the loan as long as the information you’ve given is accurate and there are no problems when a property valuation is carried out on your home.
Preparing the application: Once you’ve received a DIP, you can apply for your mortgage. You’ll need to provide various documents, usually including proof of your identity and address, income and expenditure, and paperwork relating to your existing mortgage. You can then submit your application.
Property valuation and underwriting: To make sure your property is worth what you say, and check for potential problems, the lender will arrange a valuation on your home. Its underwriters will also double-check all of the details and paperwork you’ve supplied.
Mortgage offer: If all is well, your lender will make you a mortgage offer.
Completion: If the offer is acceptable to you, sign the documents where required and a date will be arranged when the funds will be made available to you.

What documents will you need?

Different brokers and lenders are also likely to have varying requirements for arranging a second mortgage, but generally these will include the following:

Payslips from the last three months, your most recent accounts, and your annual mortgage statement. Proof of your address and identity will also be needed.
A valuation on your property – often for a second mortgage, a desktop or automated valuation conducted online will suffice, which is likely to be free. Alternatively, a lender might request a drive-by valuation, where a visit is paid to your home but an assessment is made without going inside, or a physical valuation, where an internal inspection takes place. The lender decides which valuation is needed, but if there is a cost to pay, you’ll probably need to cover it.
The consent of your first mortgage lender – this is the written permission from your existing lender that it is happy for the second mortgage to proceed. It’s best to check whether your current lender is likely to agree to this when you first start considering a second mortgage as a potential option.

While you don’t always need to get formal advice to arrange a second charge mortgage, some lenders might insist you do, and it could help you avoid taking out a loan that isn’t best suited to your needs.

How long does it take to get a second charge mortgage?

This will vary between lenders but generally you can expect to receive the funds from a second charge mortgage within three to six weeks. Second mortgages are usually quicker to arrange than a standard first charge mortgage.

Alternatives to second charge mortgages

It’s always best to explore the alternatives to a second mortgage before setting the wheels in motion on any formal application. Among the potential options you might want to consider are:

Further advance

Taking a further advance is where you borrow more from your existing mortgage lender. The rate will usually be different to the one you pay on your original mortgage, but it might still be lower than what you’re charged for a second mortgage elsewhere, and you won’t have to remortgage or switch lenders. Talk to your current lender before applying for a second mortgage, as you’ll need their consent for it to happen anyway.

Personal loan

A personal loan might prove a better alternative if you only need a small amount of funds. It doesn’t involve putting your home at additional direct risk either. However, remember to check the interest rates, particularly as unsecured loans tend to cost more than loans where you can provide security.

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Remortgaging

Remortgaging to borrow a larger amount may be viable if you have equity in your home and there are no, or relatively small, early repayment charges for exiting your current mortgage deal. If your credit score has improved, you’ve built up extra equity, or interest rates generally have fallen since taking out your original mortgage, you might even be able to secure a better deal. Of course, the opposite might be true if you now have poorer credit or rates generally have increased.

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A second charge mortgage could be a good idea if you have sufficient equity in your home and can afford to repay two mortgages. It might also be worth considering if poor credit is making it hard to get an unsecured loan, you can’t take a further advance with your existing lender, or early repayment charges and the prospect of higher interest rates means you don’t want to remortgage.

On the downside, interest rates on second mortgages tend to be higher than on standard mortgages, and you risk losing your home if you fall behind with repayments on any of the mortgages you have secured against your property.

This will depend mainly on your circumstances and whether you can afford to take out a second charge mortgage. If you have enough equity in your property and a sufficient income to support paying two mortgages, it could be relatively easy. It’s also best to check early on whether your existing mortgage lender will give permission for a second mortgage to be taken out.

Generally, second charge mortgages are regulated by the Financial Conduct Authority in the same way that it oversees traditional mortgages. One exception is where a second charge mortgage is raised against a buy-to-let property that you do not intend to live in and own solely for investment purposes.

Your current mortgage lender might not allow you to take a second mortgage if it believes there is a risk you won’t be able to afford both repayments.

If you keep up to date with your mortgage payments, including on your original mortgage, having a second charge mortgage shouldn’t cause harm to your credit score and may even improve it.

Second mortgage interest rates tend to be higher than the rates available on similar traditional mortgages to counter the extra risk taken on by second charge lenders.

Should you fail to keep up with your mortgage repayments, and your property needs to be sold to cover what you owe, the lender behind your first charge mortgage would receive their money first. Because of this, second charge mortgage lenders often charge higher rates to cover the increased risk that there might not be enough funds left to cover what they are owed once the first lender has taken what is owed to them.

It might be possible to get a third charge mortgage alongside your first and second mortgages, although it isn’t very common. Getting a third mortgage will rely on you having sufficient equity in your property, this new loan being affordable alongside your others, and each of your current lenders giving permission for the additional mortgage.

It’s also likely that a third mortgage on the same property will come with an even higher interest rate to reflect the risk the lender is taking on by being third in line behind the existing lenders for repayment should you fail to keep up with any of your mortgage repayments.

It is possible to sell up and move home, but your second charge mortgage will either need to be paid off or, if your lender agrees, transferred to your new home. Be sure to check whether early repayment charges are payable too.

You’ll usually need to approach a specialist lender to get a second charge mortgage. The largest high street lenders tend not to offer them. Using a broker can be a good way of getting a number of second mortgage quotes quickly from a range of lenders.

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Second Charge Mortgages