Getting a Second Mortgage – Pros & Cons, Tips & Tricks

Interested in a second mortgage? You’re in the right place. Every month, over 6,900 people visit our website to learn about secured loans.

In this guide, we’ll explain:

• What a second charge mortgage is.
• The cost of a bad second charge mortgage.
• The good and bad points of getting a second mortgage.
• How to ask for a second mortgage.
• Why people choose to get a second mortgage.

We know that thinking about a second mortgage can feel big and scary – you may be worried about the rules and risks.

But even if your credit score is not perfect, we can guide you on the right path. Let’s get started!

What is a second charge mortgage?

A second charge mortgage is a type of loan that is secured against the equity in your property, whilst you already have a residential mortgage on that property. The first charge mortgage was taken out to help you buy the house or flat in the first place, and the second charge is a secured loan using your home equity as collateral. Interestingly, if you were to take out a third or fourth loan against your home equity, these would also be called second charges – rather than third and fourth charges respectively. 

To understand a second charge mortgage correctly, you’re going to need to know what home equity is and how to calculate it. The equity in your property is the difference between its current market value and any debts secured against your home. For most people, this will just be their current mortgage used to buy it. The equity in your home increases as you make mortgage repayments, as long as the property value does not decrease. 

A second charge mortgage is also called a home equity loan or secured homeowner loan. Only consider taking out a second mortgage offered by a bank or loan provider that is authorised and regulated by the Financial Conduct Authority. 

The pros of getting a second mortgage

The benefits of getting a second charge mortgage might not be the same for everyone, but the generally accepted pros are:

1. You could get a loan of a greater amount compared to anywhere else. Secured loans can usually provide bigger loans because an asset is used as security. A property and home equity is the most valuable asset that can be used as collateral and therefore opens the door to the potential for a bigger loan.
2. Secured loans are known to provide competitive interest rates because the lender feels more secure knowing it is easy to recover arrears with the asset listed as collateral. Thus, second mortgages can offer competitive interest rates depending on individual circumstances. 
3. As mentioned above, the funds can be spent on an array of purposes as desired, from purchasing buy-to-let properties to a new bathroom. 
4. As you simultaneously keep your existing mortgage, you avoid any early repayment fees that could be applied if you remortgaged/refinanced the mortgage against home equity instead. 

The cons of getting a second mortgage

The cons of getting a second mortgage are:

1. Your family property is at risk if you lose your job and cannot repay
2. Your home is at increased risk of negative equity if your borrow large amounts and your property value decreases
3. You might have to pay more fees and closing costs

How does getting a second mortgage work?

Getting a second mortgage will provide you with a lump sum that is repaid over an agreed period of time, which could last from a couple of years to decades depending on your income level and size of the loan. These repayments consist of a repayment on the principal amount – i.e. the amount you borrowed – and a payment of interest as stated in your credit agreement. 

Second mortgages are also known by other names, including a home equity loan and secured homeowner loan. These both work in identical ways to what is described above. But there is another type of second charge mortgage that is not the same as above, namely a home equity line of credit (HELOC).

A HELOC provides the homeowner with a loan secured against equity, but it is not paid out as a lump sum. The homeowner can draw down on the loan over a period aptly called the draw period – a bit like using a credit card. Repayments aren’t made on the principal amount until after the draw period, but you do pay interest during it. 

Does getting a second mortgage put my home at risk?

A second mortgage is a type of secured loan, and therefore, the asset being secured is at risk if you do not keep up with repayments on this new mortgage. Because a second mortgage uses your home equity as collateral, your home may be repossessed if you have multiple missed payments. The lender will then sell your home to recover the debt and any arrears owed. 

But things are not that simple. As two mortgages are on the property, when the property is sold to repay the debt, the priority goes to the first mortgage lender. The first mortgage is paid off from the funds before the second mortgage provider is able to put its hand into the pot to recover its debt owed. If the property was sold for a fair price there should be a small amount of money left for the ex-homeowner. 

However, if the property sold for less than expected because its value has decreased, there could even be a shortfall on the second mortgage debt. This can be a serious situation depending on the size of the debt, and it could even lead to bankruptcy. Paying all your mortgage payments on time avoids this situation completely. 

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How much can I borrow?

The amount of money you can borrow when taking out a second mortgage depends on multiple factors. The first is the amount of equity you have. You won’t be able to borrow against all of your home equity because this presents risks to the lender and a negative equity risk to the homeowner. 

How much you can borrow against your equity is capped by the lender’s loan to value ratio, which is typically around 80% max. For example, someone with £100,000 home equity could in theory take out a second mortgage for up to £80,000. However, the loan to value ratio may decrease if you are judged to not be able to afford such a loan, or if you have bad credit. 

Second charge mortgage for all purposes

• Stuck paying high interest on credit card debts & loans?
• Looking to fund a home improvement project?
• Dreaming of finally taking the once-in-a-lifetime trip?

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Is it a good idea to take out a second mortgage?

Taking out a second mortgage is neither a good nor a bad idea. It all depends on personal circumstances and what other credit options are available for the amount of money you need to borrow. 

Second mortgages can be advantageous for homeowners who need to borrow large amounts that are not available using other unsecured or secured loans, or they may just provide homeowners with a lower interest rate than they can get elsewhere.  

Before settling on this option, you may want to consider:

1. Other secured loans
2. Unsecured loans
3. Debt consolidation loans
4. Home improvement loans
5. Equity release (for seniors)

Is it easier to get a second mortgage the second time?

If you have had a second charge mortgage before and now need another one, the ease or difficulty of getting one the second time around is negligible. You might have a somewhat better chance if you stuck to repayments on the first one because this will have boosted your credit score. However, all your updated finances and debts will need to be assessed and deemed affordable.