What will happen if you default on your second mortgage? Sometimes unexpected situations happen that can prevent you from repaying your second mortgage lender. If you have a recent default on your second mortgage, here’s what you should do.
Don’t try and ignore the problem and speak with a debt advice charity for further personalised support.
What is a second mortgage and how does it work?
A second mortgage is when a homeowner takes out a second mortgage on a property that already has a mortgage on it. This is done by borrowing against home equity. The first charge mortgage is the mortgage used to help buy the property, and the second charge mortgage is a way of additional borrowing secured against home equity.
For example, if you have £100,000 home equity, you might take out a second mortgage of £50,000. In this instance, you would be paid a £50,000 lump sum to be used as you like. Monthly repayments would be made until all of this money plus interest has been repaid. This mortgage will be a separate debt from your first mortgage.
Because you are borrowing and securing the agreement with home equity, there’s a chance you can borrow more and with a lower interest rate compared to a credit card, personal loan or another type of loan. But you should also consider mortgage fees and closing costs.
Your second mortgage lender could be the same as your first mortgage lender, or it could be a different mortgage lender. Some people class home equity loans as second mortgages. You will need enough equity to get one but you’ll also be subject to rigorous financial checks, including an assessment of your credit score.
How to calculate home equity for second mortgages
If you’re wondering how much you could borrow with a second mortgage, you’ll first need to know how much equity you have. To calculate home equity, simply subtract your existing mortgage balance from your property’s current market value. This may not be the same as what you paid for it, even if you purchased it recently.
If you do not have a mortgage on your property because you already paid it off, then your home equity is the same as the current property value.
You won’t be able to borrow against all of your equity. Second mortgage lenders will typically allow you to borrow against 80% maximum. This is to protect you from negative equity.
Can a mortgage company foreclose on a second mortgage?
Foreclosure is when a lender has to sell a property because the homeowner has not kept up with repayments as agreed. The money raised from the property sale is used to pay back all creditors with an interest in the property and any remaining money (if any) is given back to the homeowner.
A second mortgage lender can start foreclosure proceedings if you do not keep up with your second mortgage repayments. This is one of the biggest risks when getting second mortgages, i.e. non-repayment could mean losing your home.
However, in this instance, it is the first mortgage lender that is repaid first, and any remaining money is paid to the second mortgage lender and then the debtor. Second mortgages are always ‘junior’ to first mortgages.
If the property value has decreased and the second mortgage lender might not get all of its money back, they may choose to try and recover the money in a different way. The whole process is complex and lengthy. It’s best to avoid this situation if at all possible.
What is a second mortgage default?
A second mortgage default is when you fail to make a payment on the second charge mortgage i.e., you default on the payment.
If you miss a payment, you will receive notification from the lender to make the payment immediately. If you still do not pay, the missed payment will be classified as a default. There are rules on what makes up a default.
What happens if you default on second mortgage?
When you default on a second mortgage the lender will record the default on your credit score, which will have damning consequences. A single default will not immediately result in the lender trying to repossess the property to sell it.
Most lenders recognise that people go through a short-periods of unforeseen financial instability. They will try to work with you to come up with a long-term solution that benefits all parties and avoids the need for foreclosure.
What to do if you default on second mortgage
If you have a default on a second mortgage it is important that you start communicating with your mortgage lender. Explain what is going on and why you have defaulted. It is likely that they have a dedicated tea, ready to discuss your situation and work with you to come up with a solution. This may be lowering repayments for a set time or it may be something else.
The worst thing you can do is bury your head in the sand and hope the problem goes away. You won’t be the first person to call your second mortgage lender and have this type of conversation.
You may also want to speak with professional financial advisors, but these services come at a cost.
Can my second mortgage be forgiven?
Second mortgages can only be forgiven by the mortgage lender, including home equity loans and home equity lines of credit (HELOC). However, this is unlikely. You do have some rights if your home has been repossessed and the lender has failed to sell it for some time. It’s best to get professional debt advice if you are going through this situation.
What happens if you default on a first mortgage?
Defaulting on a first mortgage will also not immediately result in the lender trying to repossess the property.
The first mortgage lender will try to come up with a mutually beneficial solution that overcomes a rough financial patch. However, sometimes it can be better to choose repossession rather than dragging things out. You may want to get debt advice and speak with a mortgage expert.
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