Rhiannon Philps
Tim Leonard
If you already have a mortgage on your home but want to borrow more, a second charge mortgage might provide a way to take out another loan secured against your property. This could be an option if you don’t want to remortgage or are finding it difficult to get a personal loan, although taking out what is effectively a second mortgage in this way does carry some risk.
Here we explain more about how second charge mortgages work and when you might want to consider a second mortgage as a borrowing option.
Guide to second charge mortgages
A second charge mortgage is a type of loan that can be secured against your home alongside an outstanding mortgage that you’re still paying.
The equity you own in the house acts as security for the loan and will help determine how much you’re allowed to borrow.
Perhaps confusingly, you might also find second charge mortgages called homeowner loans, second mortgages and secured loans too.
» MORE: What is a secured loan?
What’s the difference between a first and second charge mortgage?
A first charge mortgage is the primary loan against your property, and will typically be the standard residential mortgage that you use to help you buy a house.
By contrast, a second charge mortgage is an additional loan secured on your property arranged through a different lender to the one behind your original mortgage. It is completely separate to your existing mortgage and, unlike with a first charge mortgage, the money raised can be used for purposes other than buying a property.
In other words, you could have both your normal mortgage (the first charge mortgage) and a second charge mortgage from another lender on one property.
How do second charge mortgages work?
Second charge mortgages work in much the same way as a traditional mortgage. You can borrow a set amount over a specified term, which could be as long as 30 years, and you make monthly repayments towards paying off that loan.
This type of borrowing carries significant risk for borrowers. As it is secured against your house, if you fall behind on your repayments, the lender could repossess your property to recover the money they are owed.
If the worst does happen and your property needs to be sold for the lender to recover their money, your main mortgage provider will have priority for the repayment of its loan over your second charge mortgage provider. If you don’t have enough equity in your property to pay off both loans, your second charge mortgage provider may take you to court to recover the amount still owed.
Because the second charge lender can only collect payment after the standard mortgage (first charge) loan is settled, interest rates on second charge mortgages tend to be higher as they come with more risk to the lender.
» MORE: Should you take out a loan against property?
How much can you borrow with a second mortgage?
The amount available to you would depend on the equity you own in your property and your financial situation. Typically, the most you’re able to borrow is around 75% to 85% of the house equity that you have, depending on the lender.
If you have a mortgage on your home, then you do not own the property outright. Instead, you hold a certain amount of house equity, which is the difference between the value of the home and the size of your outstanding mortgage.
For example, if your home is worth £200,000 and you have £100,000 left to pay on your mortgage, you have £100,000 in equity. The amount of equity you own should increase over time as you repay your mortgage (if you have a repayment mortgage) and will also go up if your property increases in value.
Because a second charge mortgage is secured against the equity you own in the property, rather than the value of the property itself, lenders will value your property to work out how much it is worth and how much equity you own.
When might you take out a second charge mortgage?
There are a few different reasons why you might consider a second charge mortgage.
For home improvements
Second charge mortgages are one way you can fund home improvements, especially if you are planning major renovations that will cost a lot of money.
For example, you might want to borrow £20,000 to build an extension to your property. As these improvements could add value to your property, you may be prepared to take out a loan secured on your house to pay for them.
To consolidate debts
If you have several different loans, you may choose to consolidate them into one loan with a second charge mortgage. You could use this loan to pay off your other debts, so you just have one loan to keep track of, with potentially more manageable monthly repayments.
However, this decision should not be taken lightly, especially if you are converting unsecured debt into secured debt, as your property would be at risk if you fail to keep up with repayments. In addition, if you increase the term of the debt to make your monthly payments more affordable, it’s likely to cost you more in the long term.
» MORE: Debt consolidation explained
If you have a poor credit score
Some people take out a second charge mortgage because they have struggled to obtain other forms of unsecured borrowing, such as a personal loan, for example. Secured loans reduce the risk for lenders as they have your property as security, so they are typically more prepared to offer loans to people who they consider a higher risk, such as individuals with a less-than-perfect or bad credit score or those who are self-employed.
If remortgaging means you would pay more in interest or fees
You might consider a second charge mortgage instead of remortgaging to release equity if you don’t want to lose the deal you have on your current mortgage. Taking out a separate second charge mortgage means you can keep the interest rate on your existing mortgage and only pay the new interest rate on the additional loan amount.
This can be useful if you managed to get a particularly competitive interest rate on your mortgage deal, or if your credit score has worsened since you took out your existing mortgage, as you wouldn’t need to pay the higher interest rate across the total amount borrowed – unlike if you remortgaged, for example.
Also, if you’re on a fixed mortgage deal, you may need to pay early repayment charges if you want to leave your current deal and remortgage. Taking out a second mortgage means you don’t need to change your current mortgage, so avoids the problem of paying any penalty fees.
Before moving forward with a second charge mortgage, always check your options with your existing mortgage lender.
» MORE: See current mortgage rates
Pros and cons of second charge mortgages
Depending on your situation, a second charge mortgage can offer a number of benefits:
- You can typically borrow a larger sum of money than with an unsecured loan.
- It can be easier for people with poorer credit scores to get approved, compared to an unsecured loan.
- Your existing mortgage deal won’t change, so the interest rate and repayments will be unaffected and you won’t need to pay any early repayment fees.
However, second charge mortgages also have some disadvantages:
- Your property is at risk so, if you miss repayments, your house could be repossessed if you default on the loan.
- Interest rates on second charge mortgages are often higher than on standard (first charge) mortgages.
- Second charge mortgages may come with early repayment charges and other fees, as well as charging interest.
Can I get a second charge mortgage?
Homeowners with an existing mortgage can take out a second charge mortgage. This doesn’t necessarily need to be secured against the house you live in, as you could apply for a second charge mortgage on a second home or buy-to-let property, for example.
You will need to own a certain amount of equity in the property to qualify for a second charge mortgage, and this will affect how much you are eligible to borrow.
And, as with any other form of borrowing, you would need to pass the lender’s affordability and credit checks.
You also need to get permission from your existing mortgage provider to get a second charge mortgage, even if you plan to apply to a different lender. If your mortgage provider thinks you wouldn’t be able to afford the extra loan repayments, it can refuse to give permission.
Second charge mortgages can be risky as you could lose your property if you default on the loan. As a result, you need to be certain that it is the best option for you and that you can afford the repayments.
» MORE: Best secured loans
Alternatives to second charge mortgages
Second charge mortgages are not your only option.
Depending on where you are in your current deal, you may be able to get an extended loan from your existing mortgage provider. This would join the existing first charge loan. If your current deal means it would be financially disadvantageous to change it, the lender may consider additional funds through a separate further advance – this would all still remain under the first charge held by the lender.
If you have sufficient equity and either nothing or little to pay to exit your current mortgage, you could consider remortgaging to borrow the extra funds that you need. Careful consideration needs to be given to the new interest rate you’d be moving to as well, particularly if rates have generally increased or your credit score has weakened since taking out your original mortgage.
Another alternative if you only need to borrow a small sum of money – between £1,000 and £25,000, for example – would be to take out a personal loan. As this type of loan is unsecured and won’t put your property at risk, it is a less risky option than a second charge mortgage.
How to get a second charge mortgage
One way to get a second charge mortgage is by comparing deals from different providers through our partner broker Norton Finance.
If you have an idea of the amount you want to borrow, how long you want to pay the loan back, and are happy to share your plans for the money you intend to raise, you’re ready to get a quote for second charge mortgages tailored to you.
WARNING: Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on a loan or any other debt secured on it.
Image source: Getty Images
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