Does a fixed-rate second mortgage really exist? Learn all about second charge mortgages in this guide with additional attention on fixed-rate second mortgages. We pack lots into this quick guide!
What is a second charge mortgage?
A second charge mortgage is an additional mortgage added to a property that already has an existing mortgage that was used to help buy the property. The original mortgage is also known as a first charge mortgage and any additional mortgage secured against the equity in your home is a second charge mortgage.
You should only consider one of these from a legal lender that is authorised and regulated by the Financial Conduct Authority (FCA).
Is a second charge the same as a second mortgage?
A second charge mortgage is a second mortgage secured against home equity and is also known just as a second charge or even as a second mortgage. Calling a second charge mortgage a “second mortgage” can be confusing because some people may assume you are referring to a second mortgage to buy another property. However, this would actually be a second first charge mortgage.
How does a second charge mortgage work?
A second charge mortgage works as a loan secured against some of the equity in your property. You can work out your amount of home equity by subtracting what you have left to pay on your first mortgage away from the current valuation of your property. You can usually borrow against a maximum of 80% of home equity, meaning someone with £100,000 equity could get a second charge amount of £80,000.
When you get a second mortgage you receive this money as a lump sum amount and then start making monthly repayments. If you do not keep up repayments the mortgage lender can repossess your home and sell it to raise money to clear all debts. The first mortgage lender will get priority to clearing the first mortgage and then the second mortgage lender can recover the money owed to them. This will not happen if you pay both your mortgage repayments as agreed. Repaying the second charge early could incur early repayment charges.
Why take out a second mortgage?
Second charge mortgages are taken out for a variety of reasons, not limited to:
- Making home improvements
- Consolidating loan and credit card debts
- Paying for holidays and expensive cars
- Helping to buy another property, maybe a holiday rental
- To pay private medical bills
- To help close family with any of the above
Are rates for a second mortgage higher?
The interest rate you are offered when taking out a second charge mortgage tends to be higher than the interest rate offered on your first mortgage.
One reason for this is because you now have a large and the second charge may not be as affordable with this in consideration, i.e. the margins are tighter. You’re also of greater risk to the lender when another lender (the first mortgage provider) has priority when recovering the debt through home repossession.
What is the interest rate on a second mortgage?
The interest rate offered on a second mortgage will depend on individual circumstances and your credit score, just like any other loan or mortgage. There is no one rate offered to everyone.
If you start comparing second charge mortgages online, you may find that a representative example interest rate is shown. This is the rate that 51% of applications were offered and is therefore only just representative of more than half of applicants.
What is a fixed-rate second mortgage?
A fixed-rate second mortgage is when the second charge comes with a fixed rate of interest, either for the first years of repayment or for the whole repayment period. This is opposed to a variable rate second mortgage where the rate of interest payable changes over time, based on the economy and other factors.
A home equity loan is a type of second charge that can come with a fixed rate of interest for part of the repayment term or for the whole term. Whereas a home equity line of credit (HELOC) has a variable rate of interest during the draw period (HELOCs paid out over time rather than as a lump sum) and after.
What are the typical fixed rates for second mortgages?
The typical interest rate on a fixed-rate second mortgage can vary from 2-11% and above. The actual fixed rate of interest you are offered will again depend on your finances, individual circumstances, loan amount and your credit rating.
The pros of a fixed-rate second mortgage
A second charge mortgage allows for some unique benefits. Here are the three main benefits when you’re able to borrow with these loans:
- Access larger credit – because you are borrowing against an amount of equity you have built up, there is potential to get a huge loan not available through other means.
- Find competitive rates – any type of secured loan should provide a lower rate of interest compared to unsecured loans.
- Use the money as you wish – As mentioned above, the money can be used as the homeowner wishes. Home improvements remain one of the most common uses and can increase property value. Doing so would increase your home equity again.
The risks of a fixed-rate second mortgage
The biggest risk when getting a fixed-rate second mortgage is that your home may be repossessed if you do not keep up repayments. As this is a type of secured loan, the lender has the right to seize and sell the asset if you have not been able to pay. Borrowing against a lesser amount for equity – possibly by saving more first – can mitigate this risk.
Will I have to pay early repayment fees?
Some fixed-rate second mortgages come with terms and conditions that mean you’ll have to pay early repayment charges if you choose to repay the full loan amount early.
Can I get a fixed-rate second mortgage with bad credit?
Anyone with bad credit can still apply for a second charge mortgage but they do have an increased likelihood of being rejected than someone with good or excellent credit history. They might still be offered a second mortgage but the interest rate could be higher.
Can I get a fixed-rate second mortgage if I’m self-employed?
Self-employed people can get a second charge mortgage just like they can get a first charge mortgage. However, people working for themselves are sometimes seen as a greater risk than those with a full-time permanent employment contract, especially after the COVID crisis. For this reason, getting a second mortgage as a self-employed worker might be a little more difficult or could be offered with higher interest.
Is a second mortgage worth it?
A second mortgage may or may not be worth it depending on your plans for the loan and what type of deal you can get. There’s no concrete answer but you can get personalised money advice from charities and groups.