What is the difference between a first and second mortgage? This guide provides a quick overview on an easy-to-understand mortgage topic. If you’re looking for credit then a second mortgage may be the solution that’s right for you. 

Not everything about mortgages is this simple!

What is a first and second charge mortgage?

When most people buy a property they cannot pay the full price agreed from the outset. They therefore use a residential mortgage to raise the rest of the money to buy the property. This initial mortgage is also known as a first charge mortgage

A second charge mortgage is when an additional mortgage is taken out against the same property in the future without the first mortgage being fully repaid. 

Second charge mortgages in detail

To understand what a second mortgage really is, you first need to know what home equity is. Home equity is the amount of your property you have paid off and own outright, and it is often expressed as a percentage of the property as well as a financial sum. 

To understand home equity properly, it’s best done with an example. If your home is worth £200,000 and your remaining first mortgage balance is £100,000, you have £100,000 in home equity (£200,000 – £100,000), which can also be expressed as 50% home equity. As you continue to make monthly mortgage payments, your home equity will increase providing the value of the home doesn’t decrease. 

A second mortgage is when you borrow money and use your home equity as collateral in the credit agreement. You may be able to borrow around 80%+ of your home equity within a second mortgage, which allows some homeowners to access more credit than they would be able to with personal loans and credit cards.  

If you are unable to pay your mortgages and you need to sell the property or the first mortgage provider repossess it to sell, it is the first mortgage provider who gets priority over the money to repay the first mortgage. The second mortgage provider will get access to any remaining funds to recover the second mortgage debt. However, unless the property significant loses value, both mortgage providers should be able to be repaid. 

What is the primary difference between a first and second mortgage?

The primary difference between a first and second charge mortgage is what these mortgages are secured against. With a first residential mortgage, the loan amount is secured against the property itself. But with a second charge mortgage, the loan amount is secured against home equity, which is not exactly the same as securing it against the property. 

What is the point of a second mortgage?

The reason many people choose to use a second mortgage is to access large amounts of credit and/or get a lower interest rate than other credit options, especially unsecured loans. The money is then used for scores of different reasons without restrictions. 

Some of the most common uses of the money borrowed with a second mortgage are:

  1. Consolidating debts – the money is used to pay off multiple creditors so all debt is now in one place. However, this is only worthwhile if the repayment terms of the second mortgage are more favourable than the debts paid off, including fees. 
  2. Home improvements – some use the money to pay for significant home renovations, such as new kitchens and bathrooms, loft conversions and conservatories. This usually adds value to the property too! 
  3. Supporting family – the money may be used to help family members with their own financial problems, including buying their first property. 
  4. Buy cars – some people use the money to buy a new vehicle.
  5. Pay for holidays – the money may be used to fund once-in-a-lifetime holidays or round-the-world trips. 
  6. Education and medical expenses – a second mortgage can be used to help pay for private medical care and private or university education. 

What is the downside to a second mortgage?

Choosing to take out a second mortgage on a property will make it take longer to pay off both mortgages and be an outright homeowner. Moreover, a second mortgage usually has higher interest than a first mortgage because the first mortgage has priority access to money if the home is sold. 

Let’s not forget that if you are unable to repay then there is a real chance of being forced to sell your home to pay back the debts. 

How do you get a second mortgage?

Most mortgage lenders, such as banks and building societies, are willing to provide second mortgages. However, each application will be judged on its own merits and having home equity is not enough. Your personal finances will be assessed including details of the existing mortgage and other debts. The lender will also check your credit score. 

Only apply for a first or second mortgage with a lender that is authorised and regulated by the Financial Conduct Authority (FCA). 

Is a second mortgage worth it?

The worthiness of a second charge mortgage will depend entirely on personal circumstances and what the money is being used for. The answer to this is more clear cut for purposes like debt consolidation than it is for home renovations. The reason it may not be worth it is simply that second mortgages typically have a much higher interest rate than a first residential mortgage. 

Your alternative options to a second mortgage

It’s Important to consider all options when seeking credit. Instead of a second charge mortgage, you may want to learn about:

  1. Home equity loans
  2. Remortgaging and cash-out refinancing
  3. Secured personal loans
  4. Home improvement loans (if you plan to do renovations)
  5. Debt consolidation loans (if you plan to merge debts together) 

More mortgage help at MoneyNerd! 

Whether you want to learn about first residential mortgages or second charge mortgages, MoneyNerd has bags more information on our site and blog. Search your first and second charge mortgage questions today! 

About the author

Scott Nelson

Scott Nelson is a financial services expert, with over 10 years’ experience in the industry, including 6 years in FCA regulated companies. Read more
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