A second charge mortgage could be an advantageous way for homeowners to borrow money for home improvements, debt consolidation or something else. This short but concise guide will explain everything you need to know about second charge mortgages, including benefits, risks and frequently asked questions by the British public.
Can you get a second mortgage on the same house?
Homeowners can take out a second mortgage on the same house, which is a loan secured against a proportion of home equity. Taking out a second mortgage means having a second debt attached to your home and separate monthly repayments from your original mortgage, even if both mortgages are with the same lender.
A second mortgage on one house is known as a second charge mortgage, but it might also be known as a home equity loan or secured homeowner loan. You should only consider any of these with lenders that are authorised and regulated by the Financial Conduct Authority (FCA).
What’s a second charge mortgage?
A second charge mortgage is a type of second mortgage taken out on a property with an existing mortgage already, as opposed to a second first charge mortgage used to buy a second home. It is a secured loan that uses home equity as collateral within the credit agreement. This means your home is at risk if you do not keep up repayments as agreed.
You should think carefully before securing a second charge or any other type of loan against your family home.
How does a second charge mortgage work?
Taking out a second charge mortgage provides the homeowner with a lump sum amount that is then repaid over a fixed period of monthly payments. These repayments are made up of repayment of the principal loan amount as well as a rate of interest, which may be a variable or fixed rate. If you want to repay the full amount before the repayment period ends, you may be subject to early repayment charges.
The second charge is secured against home equity. Securing debts against your home creates the risk that your home may be repossessed if you don’t repay as agreed – and then sold to pay off the debt.
The amount of home equity you have built up will help determine how much you can borrow.
How much can I borrow with a second mortgage?
The amount of money you can borrow is dependent on multiple factors. The two most important factors that decide how much you can borrow through second mortgages is the amount of home equity you have and your chosen lender’s loan to value ratio, also known as LTV.
Starting with home equity, this is the amount of your home you own outright and is typically expressed as a percentage and a financial sum. It’s worked out by subtracting your remaining first mortgage balance away from the current property value. For example, a £240,000 property with a remaining £100,000 mortgage has £140,000 home equity.
You can’t borrow against 100% of your equity, but people with good finances and a positive credit score can usually borrow as much as 80% of their equity if it is deemed affordable to you by the lender. This is the LTV ratio mentioned earlier. So, if you have £140,000 home equity the maximum you could borrow in most cases (and the best case) would be £112,000.
You should want to borrow as little against your home equity as possible to reduce the risk of losing your home and negative home equity.
The pros of second mortgages
The main benefits of using a second mortgage are:
- Borrow against home equity which can allow you to get a loan amount beyond standard unsecured and secured personal loans of usually £25,000. You could even borrow over £100,000 in some cases.
- Because you are securing the loan with your home equity, you might be able to find more competitive interest rates than alternative credit options.
- The money can be used without restrictions and spent as you need.
Some of the drawbacks are the risk to your property and the risk of negative equity in the event your property valuation sinks, which could be out of your control.
Why take out a second charge mortgage?
There are lots of reasons to take out a second mortgage borrowed against the equity in your home. One of the most common is to complete home renovations and home improvements. The loan amount could help pay for building work, a new kitchen or smaller cosmetic improvements to your property.
One advantage of taking out a second mortgage to pay for home improvements is that it can increase the value of your home, and therefore, re-increase your home equity. Other common reasons to use a second mortgage are:
- Debt consolidation – the process of merging debts together to make them more manageable and to save money on lower interest.
- Holidays – to pay for memorable trips and holidays
- Weddings and occasions – to pay for special events
- To buy a second property – the money could help pay for a holiday home or buy-to-let rental
- Medical bills – the loan could be used to pay for private medical expenses
The risks of a second charge mortgage
The greatest risk of second charge mortgages is that you could lose your home if you do not keep up with monthly payments as agreed when you took out the mortgage. If you have failed to pay back and there is no other way for the lender to recover the debt, they have the authority to repossess and sell your home to raise money.
Once the property is sold, the money raised from the sale is first used to repay the first mortgage provider. The remaining money is used to pay back the second charge mortgage lender and anything leftover is given back to the debtor.
However, if the total amount raised from the sale does not cover the second mortgage debt – this is possible if the home’s value has decreased and you’re in negative equity – the debtor could find themselves in serious debt and might even have to consider bankruptcy.
Can a mortgage company refuse a second mortgage?
Having home equity is not enough to guarantee your second charge mortgage application will be approved. Just like any unsecured or secured loan, your chosen lender will have to ensure you can afford the monthly repayments. This means checking your personal finances, including your regular income and existing debt.
The lender will also check your credit rating. If you have previous of not handling your finances and debt repayments well, they could reject your application for this reason alone. However, people with a poor credit rating have been known to secure home equity loans and second charge mortgages, but they may have to pay a higher interest rate.
Can you remortgage a second charge mortgage?
You might be able to remortgage a second charge mortgage to get a better repayment deal with a lower interest rate, but this can be complicated. When remortgaging you might have to pay early repayment fees on the original second charge mortgage, which adds another expense to the process and could make it unworthwhile.
You may want to consider finance or mortgage advice services when looking for a better mortgage deal or home equity loan.
Further second charge mortgage guides!
That’s our introduction to second charge mortgages. For more information on second charge mortgages or to get answers to relevant questions, search for yours on MoneyNerd. With so many new posts released on second charge mortgages, it’s almost certain we’ve covered your question already.
And if you don’t read on, remember to only apply to lenders that are legitimate, which means being authorised and regulated by the Financial Conduct Authority.