What are the best second mortgage rates and how can you find them? This guide is dedicated to discussing the key details about second charge mortgages and the rates of interest on offer today.
If you’re considering a second charge loan on your home, you have to hear this first!
What is a second charge mortgage?
A second charge mortgage is a second mortgage taken out against a property with an existing mortgage. The homeowner is already paying off one mortgage to buy the property, known as a first charge, and then takes out a second charge mortgage as a type of secured loan using the home as collateral.
A second charge mortgage is a term used to describe different loans that enable the homeowner to borrow against home equity. They are also known as home equity loans, home equity lines of credit and homeowner loans. If you are thinking about taking out any of these, only consider lenders that are authorised and regulated by the Financial Conduct Authority (FCA).
Second charge vs second mortgage
Second charge mortgages are also known as second mortgages. The two terms are used interchangeably by many people. However, this can cause confusion. People discussing second mortgages may be referring to a second charge, or they could be referring to a second mortgage to buy another property, i.e. a second first charge mortgage (second home mortgage). It’s usually easy to note the difference by the context of the discussion.
How much can I borrow with a second charge mortgage?
One of the pros of using a second charge is that these loans can provide a greater loan amount in comparison to other credit options. The money you could borrow using a second charge could be substantial and help you to complete costly renovations and buy big-ticket items.
These loans are secured against your available home equity, and therefore the equity in your home helps to determine how much you can borrow. Most lenders have a maximum loan to value ratio of around 80%, meaning you could borrow up to a value of 80% of your equity depending on personal finances and your credit score.
For example, someone who has paid off most of their mortgage with £150,000 home equity may be able to get a loan up to £120,000. Most people don’t borrow near this figure, but can still borrow significant amounts.
What happens if I cannot keep up repayments?
If you fail to keep up monthly repayments and cannot agree on a solution with the second charge lender, they may decide to repossess your home. The property would then be sold and the money raised would first be used to pay off the remaining first charge mortgage balance. The remainder of the money is used to pay off the second charge loan debt and anything leftover is the homeowner’s money to keep.
Responsible lending prevents situations where the sale value isn’t enough to cover all debts. However, if the property goes down in value since the mortgages were taken out, there may be a shortfall that causes significant debt problems.
Fixed vs variable second charge mortgage rates
Some second charge mortgage products come with fixed interest, whereas some come with variable interest. Fixed interest is when the interest rate remains the same over time, despite changes to the economy or the Bank of England’s base rate. Variable interest is where the interest rate changes at the lender’s discretion based on the aforementioned factors.
Some second charge mortgage products are more likely to have a fixed rate or variable rate. For example, a home equity line of credit, better known as a HELOC, is more likely to have variable interest throughout the draw period and after.
What is the current interest rate for second mortgages?
Second charge mortgage interest rates can vary from as low as 2% to 20% and more. Securing a second charge mortgage with an interest rate between 2-7% is considered good at the time of writing and subject to change. To get the best second mortgage rates, you’ll need to prove the loan is affordable and have an excellent credit report.
Are second mortgage rates higher?
Second charge mortgage rates are usually higher than the interest rate you were offered on your first charge mortgage. The main reason for this is because having the first charge means you have more debt and are therefore a greater lending risk. It will be harder to satisfy affordability tests with bigger existing debt.
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.
How to find the best second mortgage rates
To find the best mortgage deals with the lowest interest rates, you must do extensive and meticulous research. The UK has a wide second charge mortgage market with banks, building societies and mortgage specialists providing these types of secured loans.
You should research these products extensively before starting your research (such as reading our guides!) and seek commercial or free finance advice first. You may choose to use comparison websites or a mortgage broker to help search the market and secure your loan. These groups and professionals may secure you a better deal than you would searching alone, but that is not guaranteed and they may charge for their service.
Using second charge mortgage calculators can help you uncover the best mortgage rates. But be aware that these online tools are not accurate for almost 50% of users, so take them with a pinch of salt.
Best second mortgage lenders
The best mortgage lenders with the best second mortgage rates hinge on personal finances and credit history. There is no one lender that offers the best guaranteed rate, but some do offer lower representative rates than others, which may not be the rate you’re offered.
Just remember to only apply for a second charge from lenders that are legitimate, meaning they are authorised and regulated by the Financial Conduct Authority and are listed on the Financial Services Register.
Second charge mortgage fees
Taking out a second charge is not like taking out unsecured loans. You may need to pay an additional fee or fees depending on the lender you are using. You should consider these as well as seeking the best second mortgage rates.
- Arrangement fee
The arrangement fee is a common charge applied to most second mortgages. This is somewhat of an administration cost to arrange the loan and set it up. But the cost may be spread over the lifetime of your monthly payments.
- Appraisal costs
To work out how much you can borrow, the lender needs to know how much equity you have. And to do this, an updated property valuation could be needed. There may be a fee payable by the homeowner to work out the latest valuation, known as an appraisal cost. Some lenders do not charge this fee.
- Closing costs
Closing costs are applied to most first charge mortgages, second home mortgages and second charges. It is a fee to close the loan at the end of the repayment term when all monthly payments have been made. The fee can range from 2-5% of the total loan amount.
- Early repayment fee
Some homeowners decide they want to pay off their second charge earlier than agreed. To do so, they might have to pay an early repayment charge which is similar to the expense of closing costs. This fee may also be payable if you switch your second charge to a different deal, just like remortgaging a first charge.
Is a second mortgage cheaper?
A second charge is not known to be cheaper than a first charge mortgage. With an existing mortgage when you apply for the second charge, you are seen as a greater lending risk.
However, if your finances and credit history has improved dramatically, there is a small chance you could get a better deal. In this case, you may also want to consider remortgaging your first mortgage for a better deal as well.
Can I get a second mortgage interest only?
Interest-only second mortgages don’t exist in that there is no second charge that only requires you to pay back the interest and none of the capital. However, there are some equity release products that do this.
A HELOC is the closest thing to an interest-only second mortgage. It is a type of home equity loan that provides the loan over a draw period as the homeowner requires. Throughout this draw period, only (variable) interest is payable. But once the draw period finishes, the homeowner must pay the loan amount back plus interest.
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.
Although losing your home is a real possibility, many people borrow responsibly and avoid such issues.
Second mortgage interest deduction – news update
If you use a second charge to buy a rental property with a buy-to-let mortgage, be aware that you can no longer consider interest payments on any mortgage as tax-deductible on rental properties. HMRC closed this loophole in April 2020 and has replaced it with a tax credit system for landlords.
The good news is that basic rate taxpayers can still receive a 20% tax credit, resulting in no difference for them and their tax bill. But wealthier higher rate taxpayers at 40% will not benefit from the new system.
It has never been possible to claim any second home mortgage interest payments as tax-deductible when the second home is being used as a holiday home or second residential property, rather than a rental investment.
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