What Homeowners Need To Know About Taking Out 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 property equity you have.
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 and a second charge mortgage on one property.
Confusingly, second charge mortgages are known by a host of different names too, such as homeowner 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 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.
They 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.
» MORE: Read our guide to mortgages
Why take out a second charge mortgage?
There are a few different reasons you might consider a second charge mortgage.
One is if you want to carry out some costly home improvements but don’t want to go down the route of a traditional mortgage.
For example, you might want to borrow £20,000 to build an extension to your property, but you are only two years into a five-year fixed-rate mortgage so changing that could cost you a lot of money in repayment charges. Your lender may be able to offer you additional borrowing without touching your existing deal, so you effectively have two portions to your mortgage. But rates could have changed and you might want to consider more than one option. In this instance, a second charge mortgage might seem an attractive alternative, as you can raise the funds needed for the building work without touching your existing mortgage.
Another common reason for taking out a second charge mortgage is to consolidate a host of different loans you already have into one single loan. It might be that you have a personal loan and a couple of credit cards already, and keeping up with them all, and the different repayment dates for each, is proving complicated.
You may be able to take out a secured loan to pay them all off, and then you would only have a single loan to keep track of. This can also help you keep on top of precisely how much you owe at any one point. Doing this should not be taken lightly, as you would be converting unsecured debt to secured debt. This means your property may be at risk if you fail to keep up with repayments.In addition, if you increase the term of the debt, it’s likely to cost you more in the long term.
Some people take out second charge mortgages because they have struggled to obtain other forms of unsecured borrowing, like a personal loan, for example.
Alternatively, if your credit record has worsened since you took out your existing mortgage, taking out a second charge mortgage means you don’t end up paying a higher interest rate across both loans.
How can I get a second charge mortgage?
There are plenty of different lenders who offer second charge mortgages, though they may not all be household names.
» COMPARE: Second charge mortgages
Alternatively you can apply through a mortgage adviser.Going through an adviser has a couple of clear 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’s 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 that’s an additional cost you will need to take into account.
» MORE: Do I need a mortgage adviser?
The pros and cons of second charge mortgages
A second charge mortgage can be a useful option if you need to borrow and don’t want to or can’t take out a traditional mortgage, but there are downsides to consider.
It can prove an expensive way to borrow too. It may cost less to remortgage, particularly if doing so will not incur any early repayment charges. This also means that you don’t have two separate loans, and repayment days, to keep on top of.
It’s also important to be aware that if you fall behind on your repayments, the lender may repossess your home to recover the money you owe.
If you use a second charge mortgage for debt consolidation, by extending the term of the loan, it is likely to mean you end up repaying more in the long term.
Source: Getty Images
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