“Can a second mortgage be refinanced?”
- MoneyNerd reader
This is a common question among homeowners with a second charge mortgage on their property. To answer this question clearly, we’ve broken it down into parts and also answered some related FAQs.
Learn if it’s possible to refinance a second mortgage in this new MoneyNerd guide!
How does home equity work?
Home equity is the amount of money you have built up in your property through mortgage repayments. It is calculated by subtracting the remaining mortgage balance away from the current market value for your property. For example, a £175,000 property with an existing mortgage of £75,000 will have £100,000 home equity. Home equity can also increase due to the property value rising.
What is refinancing a mortgage?
Refinancing a mortgage is when you swap your existing mortgage for a new one. The term refinancing is more common in other countries like the USA and is comparable to remortgaging in the UK.
When you refinance your mortgage you ask the new mortgage provider to pay the outstanding balance on your first mortgage, so you still only have one mortgage to pay. It is not the same as taking out a second charge mortgage where one property has two mortgages at once (read below!)
Some people choose to refinance and borrow extra by securing the additional borrowing against any home equity available. For example, if your outstanding mortgage balance is £75,000, you might ask for a new mortgage of £90,000 so you can pay back the £70,000 first mortgage debt and have additional money to spend on other things.
What is a second charge mortgage?
As alluded to above, a second charge mortgage is when a homeowner decides to utilise some of their home equity by taking out a second mortgage on the same property where a residential mortgage debt already exists. Once the second charge mortgage is active, the homeowner will need to make two mortgage payments each month.
The second charge mortgage is secured against home equity just like how refinancing a mortgage with additional borrowing uses home equity to borrow more. However, when refinancing a mortgage you pay off the first mortgage completely and may have to pay early repayment fees as a result.
Is a home equity loan a second charge mortgage?
A home equity loan is sometimes referred to as a second charge mortgage because it is also a separate debt that is secured against home equity and repaid in the same way as a second mortgage would be.
A home equity line of credit (HELOC) has a couple of differences in the way the loan is paid out and repaid, but this is also referred to as a second charge mortgage by some people.
Is it better to refinance or get a second mortgage?
There are pros and cons of either refinancing or getting a second charge mortgage to borrow additional funds – usually for home renovations or debt consolidation purposes. The best decision for you should be based on personal circumstances and finances alone.
One of the biggest advantages of choosing to take out a second mortgage or home equity loan is that you do not need to pay off your first mortgage and can therefore avoid having to pay early repayment fees (if applicable). However, the former options may include loan fees of their own, such as closing costs. Consider all of the facts before making a decision.
Can a second mortgage be refinanced?
Refinancing a second charge mortgage is possible. Doing so may help the homeowner to access improved repayment terms, such as a lower rate of interest. Or it could even help the homeowner to utilise even more of their home equity by refinancing and borrowing more than what is needed to pay back the second charge mortgage.
You may be subject to fees for paying back the second charge mortgage earlier than planned.
Can you refinance just your second mortgage?
Yes, you can refinance your second charge mortgage alone without having to include your first charge mortgage. This will mean you continue to have two monthly separate mortgage payments rather than one.
How to refinance a second mortgage
To refinance your second charge mortgage for a better rate or increased borrowing against home equity, you will need to search mortgage providers to see what products are available. The process is the same as any other time you would want to refinance a mortgage.
Your application will be subject to stringent checks and your credit score will be assessed. Having more home equity will not be the only factor that decides your second charge mortgage refinancing application.
Refinancing first and second mortgage together
Alternatively, you may wish to refinance and get a new mortgage that will pay off both your first charge mortgage and second charge mortgage. The benefit of this is that it streamlines your mortgage payment into a single debt with one monthly repayment.
The disadvantage of doing so is that you could be subject to early repayment fees on both the first charge and second charge mortgages.
Can you remortgage if you have a second mortgage?
Is it possible to remortgage your first charge mortgage if you have a second mortgage on the same property? The process is not as straightforward but it is still possible. You will be refinancing your mortgage for the amount owed on the first charge mortgage only. Or you may want to borrow more using home equity.
However, as some of your home equity is being used to secure the second charge mortgage, the amount of home equity you have available to borrow against will be calculated by subtracting both existing mortgage balances away from the property’s current market value.
More refinancing and second mortgage support!
Refinancing, remortgaging and second charge mortgages can be confusing. Our MoneyNerd guides are made to make these topics easier to understand without jargon. Browse our blog again soon for more free information and financial support.