What is a Second Charge Mortgage?
A second charge mortgage lets you turn some of your home equity into funds you can use for a variety of reasons. If you take out a second charge mortgage, also known as a second mortgage or a homeowner loan, the amount you can borrow is limited by the amount of equity you own in your property.
A second charge mortgage is a type of loan which can be secured against a property that already has an outstanding mortgage on it. In other words, it means you could have both your normal mortgage (the first charge mortgage) and a second charge mortgage from a different lender on one property.
Second charge mortgages are one option for homeowners who are looking to borrow larger sums of money than are available on personal loans. You can typically borrow from £10,000 to over £100,000 with a second charge mortgage, although the amount available to you would depend on the equity you own and your financial situation.
Confusingly, second charge mortgages are known by a host of different names too, such as homeowner loans, secured loans, and second mortgages.
Here, we explain more about how second charge mortgages work and when you might need one.
How do second charge mortgages work?
If you own a property with a mortgage, 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 if you sold it 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 of 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.
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.
You will typically be able to borrow up to 75% of the equity you own in the property, though this will vary between lenders and depend on your situation.
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 25 years, and you make monthly repayments towards paying off that loan.
This type of borrowing carries significant risk for borrowers. As they are secured on 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.
» MORE: How does a secured loan work?
Why 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, like 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 poor credit scores 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 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 fees 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.
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.
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.
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.
» COMPARE: Personal loan rates
How to get a second charge mortgage
If the above is not viable, you may be able to apply for a second charge mortgage from your existing mortgage provider. This would be a separate agreement to your current mortgage deal, so you are likely to pay a different rate of interest.
However, you can choose to take out a second charge mortgage from a different lender. It’s worth comparing deals from different providers, so you can find the one that is most suitable for you.
» COMPARE: Second charge mortgages
Alternatively, you can apply through a mortgage adviser. Going through an adviser, also known as a broker, has a couple of benefits. Firstly, the adviser can help guide you towards lenders that are most likely to accept an application from someone in your position and identify which products are most suitable to your needs.
But there is also the fact that some lenders only offer their products through advisers, meaning you would not be able to apply for them directly.
However, advisers may charge for their advice so it’s an additional cost you will need to take into account.
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.
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John Fitzsimons has been writing about finance since 2007. He is the former editor of Mortgage Solutions and loveMONEY and his work has appeared in The Sunday Times, The Mirror, The Sun and Forbes. Read more
Rhiannon is a financial writer for NerdWallet, with a particular interest in personal finance and insurance guides for consumers. Read more