Second charge mortgage rates: comparing total costs

Understanding second charge mortgage rates can seem tricky. Don't worry; you're in the right place.

In this easy guide, we’ll explain:

• What a second charge mortgage is.
• The real cost of a bad second charge mortgage.
• The difference between a second charge and a second mortgage.
• The amount you can borrow with a second charge mortgage.
• How to get a free quote for a second charge mortgage.

In May 2022, over 2,800 homeowners took out second charge mortgages, marking a significant 43% increase from May 2021.¹ This highlights the importance of being well-informed when making such financial decisions.

We understand that you might be worried about the specifics of a second charge mortgage, but you’re not alone. We’re here to help you with clear, simple advice. 

What is the current interest rate for second mortgages?

Rates and eligibility change and depend on the product and your circumstances. Obtain a current personalised quotation or mortgage illustration and compare the total cost, fees, rate type and repayment terms; figures in this article are not live offers.

A “good” rate cannot be defined by an old percentage range. Compare current personalised offers for the same borrowing amount, term and security.

You’ll need to prove the loan is affordable and have an excellent credit report to get the best second mortgage rates. 

Are the rates higher?

Second charge mortgage rates are usually higher than the interest rate you were offered on your first charge mortgage.

A second-charge lender ranks behind the first lender on sale proceeds, which can increase its risk and pricing. Your combined commitments also affect affordability.

However, the second charge interest rate will be determined by personal circumstances and your credit score, which may have improved since taking out your first charge mortgage. 

Second Charge Mortgages vs Remortgage

Homeowners exploring financing options often consider second charge mortgages and remortgages. In this table, we’ll compare these alternatives to help you make an informed decision.

How to find the best second mortgage rates

It would be best to do extensive and meticulous research to find the best mortgage deals with the lowest interest rates.

The UK has a broad second charge mortgage market with banks, building societies and mortgage specialists providing these types of secured loans. 

For second mortgage affordability, before starting your research, you should research these products extensively and seek commercial or free finance advice first.

You may use comparison websites for a second mortgage comparison, or you can enlist a mortgage broker’s help to search the market and secure your loan.

These groups and professionals may secure you a better deal than if you were searching alone, but that is not guaranteed, and they may charge for financial advice on second mortgages.

A calculator estimates payments using its stated amount, rate and term. It is not a lending offer, eligibility confirmation or suitability assessment. Compare the personalised terms and total cost before applying.

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Enquire about a secured loan through Loans Warehouse

Advertisement. Loans Warehouse is a credit broker, not a lender. Approval and terms depend on checks. Compare the full cost before applying. MoneyNerd may receive a referral fee. Your home may be repossessed if you do not keep up repayments on a loan secured against it. Fees may apply. Ask Loans Warehouse about any fees before you decide whether to proceed.

Best second mortgage lenders

The best mortgage lenders with the best second mortgage rates hinge on personal finances and credit history.

No one lender offers the best-guaranteed rate, but some provide lower representative rates than others, which may not be the rate you’re offered. 

Remember to only apply to FCA regulated second charge lenders that are authorised and regulated by the Financial Conduct Authority and are listed on the Financial Services Register. 

What are the fees?

Taking out a second charge is not like taking out unsecured loans.

Depending on your lender, you may need to pay additional second mortgage fees and costs. It would be best if you considered these as well as seeking the best second mortgage rates.

1. Arrangement fee

The arrangement fee is a common charge applied to most second mortgages. It is somewhat of an administration cost to arrange and set the loan. But the cost may be spread over the lifetime of your monthly payments. 

2. Appraisal costs

To determine how much you can borrow, the lender needs to know your equity. And to do this, an updated property valuation could be required. The homeowner may pay a fee to work out the latest valuation, known as an appraisal cost. Some lenders do not charge this fee. 

3. Closing costs

UK mortgage fees are product-specific. Check arrangement, broker, valuation, legal, redemption-administration and early-repayment charges; there is no universal 2–5% fee payable at the end of every mortgage.

4. Early repayment fee

Early repayment can trigger a contractual charge. Ask for a redemption figure before repaying or refinancing; this is separate from any administration or legal fee.

Is a second mortgage a good idea?

A second charge can be a very good idea for homeowners requiring large amounts of credit and are seeking a competitive interest rate within the secured loan market.

Some people believe they are a bad idea because not keeping up repayments on your mortgage means your home may be repossessed. 

Even an initially affordable loan can become difficult after a change in income or rates. Compare alternatives and plan for adverse circumstances.

Can I get a second mortgage interest only?

Interest-only second-charge arrangements can exist, subject to product availability and eligibility. Interest-only means regular payments do not reduce the capital; the principal remains due under an acceptable repayment plan.

A HELOC is not the only possible structure involving interest-only payments, and US product descriptions should not be assumed to apply in the UK.

A US-style home equity line of credit (HELOC) should not be assumed to be a standard UK product. Any UK revolving or drawdown secured facility has its own availability, fees and payment terms. Check whether interest or capital payments are required during the drawdown period and how the balance must be repaid.

Check when all outstanding capital must be repaid and how the proposed repayment method will achieve that.

Tax treatment of residential letting finance

For individual residential landlords, eligible finance costs generally receive a basic-rate Income Tax reduction rather than being deducted in full from rental income. Rules depend on the use of funds and ownership structure.

This restriction has applied fully since the 2020–21 tax year. Companies and other arrangements can have different tax treatment; obtain advice for your case.

The reduction is subject to statutory limits. A basic-rate taxpayer is not guaranteed exactly the same tax bill as under the old rules.

Higher-rate taxpayers can still receive the applicable basic-rate reduction; they are not excluded simply because of their tax band.

Borrowing for a purely private holiday or second home does not create rental-business finance-cost relief. Mixed use needs an appropriate allocation and tax advice.

References

1. Finance & Leasing Association – Second charge mortgage statistics