How much can I borrow for a second mortgage? This question gets a lot of traction online. But it’s getting asked by two groups of people with entirely different situations in mind.
One group wants to know how much they can borrow on a second charge mortgage, and the other wants to know how much they can borrow on a second mortgage when trying to buy a second property.
We tackle this frequently asked question from both angles here. If you’re looking for the answer to the latter (buying a second home) then jump towards the end of our guide for the answer.
Can you take out two mortgages on one property?
It is possible to take out two mortgages on the same property as long as the second mortgage can be secured with home equity. After paying your existing mortgage over time, your home equity will grow enough so you can take out another mortgage against it – if needed. We discuss some of the reasons you may choose to do this shortly.
A second mortgage on a property that has an existing mortgage is officially known as a second charge mortgage. The first charge mortgage being the mortgage taken out to help buy the property.
What is a second charge mortgage?
A second charge mortgage is a second mortgage taken out on a property that already has a mortgage against it. The second mortgage is a secured loan that uses the home equity you have built up through mortgage repayments as collateral.
You will receive a lump sum amount that needs to be repaid over a fixed period. If you fail to keep up with repayments the lender has the same powers as your first mortgage provider. They can repossess the property and sell it to recover the debt.
However, if the second mortgage lender has to do this, the money raised from the property sale must be used to repay your first mortgage provider before repaying the second mortgage debt outstanding. Any remaining money would be the debtor’s.
You’ll find that second charge mortgages are also referred to as just second mortgages. This is what caused scores of people to search “How much can I borrow for a second mortgage?” with two different situations in mind.
When searching for mortgage lenders that provide second mortgages, only consider those that are authorised and regulated by the Financial Conduct Authority (FCA). You can check this on the Financial Services Register.
Why take out a second mortgage?
Taking out a second mortgage will provide you with a loan that can be used as you wish. There are no restrictions on what you use the money for, but many people choose to use it for similar expenses.
The two most common reasons to get a second mortgage are to pay for home improvements and renovations or to consolidate debts and save some money.
Other reasons someone may use a second charge mortgage are:
- To help buy a second home or holiday home by using the funds as a deposit
- To help family members buy a home (see above)
- To help buy a buy-to-let investment property
- Pay for private education or university costs
- Pay for private medical bill
- Buy expensive cars or go on memorable holidays
The pros and cons of a second charge mortgage
The benefits and drawbacks of a second charge mortgage may not be exactly the same for everyone. Personal circumstances can affect how a second mortgage would be for you. However, there are general pros and cons of a second charge mortgage of which you should be aware:
- Potential to access large credit amounts
- Potential for lower interest rates
- Avoid early repayment charges by remortgaging
- Dependent on your home equity
- Risk losing your home if you cannot repay
- Additional mortgage fees, including the possibility of expensive closing costs
Eligibility for a second charge mortgage
To be eligible for a second mortgage you will first need to have amassed enough home equity to take out the second charge mortgage. Some lenders require the homeowner to take out a second mortgage of a minimum amount, meaning you’ll need to have more home equity than that amount for it to be possible. You’ll also need to be a UK resident to access these types of mortgages.
That’s the basic eligibility covered, but to be approved you’ll need to prove you can afford the monthly repayments. This means revealing details of your personal finances, not limited to your income and other debts. The lender will calculate how much of your income will be needed to pay all your existing debts such as a first mortgage, as well as the proposed second charge mortgage.
Your credit score will also be assessed to see how you manage your debt repayments.
Can I afford a second mortgage?
It is your debt to income ratio that determines if you can afford to get a second charge mortgage with an existing mortgage.
The mortgage provider will need to complete affordability checks that compare how much you earn against your essential debt expenses, such as your existing mortgage and any other debt repayments you have agreed to.
It’s not just about making sure your debts are less than your total income because your income also has to pay for everyday bills and living expenses. Your total debts should be less than 40% of your income, and even some lenders would consider this as too high.
There’s no fixed percentage your debt payments must be less than relative to income, but the lower the percentage the greater the chance of being judged to afford the second charge mortgage.
You may believe you can afford it, but you have to convince a lender which uses statistics rather than promises to eat out less and to stop buying expensive coffees on your way to work.
Second mortgage maximum loan amount
Second charge mortgage providers do not allow you to borrow against all of your home equity. To protect themselves from overborrowing without sufficient collateral, and to protect you from a situation of negative equity (if your home value decreases), they cap the amount of equity you can borrow against. The cap is usually between 80-85% with most lenders, but there might be a few exceptions.
For example, if you had £150,000 home equity after years of mortgage repayments, a second charge mortgage with an 80% LTV would allow you to borrow £120,000 maximum.
However, this is only the case if you qualify for the maximum amount. If your finances aren’t ideal or you have a low credit score, you could not be eligible for the lender’s highest loan to value ratio and may not be able to borrow against more of your home equity.
Alternatives to a second charge mortgage
If you plan on using a second charge mortgage to pay for home improvements, a new car or something else, there are other credit options.
Here are some of the most used alternatives to getting a second charge mortgage:
- Home equity loans
Home equity loans are considered a type of second mortgage to many people. They’re loans that are secured against your home equity with similar benefits and risks. If you’ve only been shopping around for second mortgages, make sure you search for these as well. They could unearth some more options.
- Home equity lines of credit (HELOC)
A HELOC is a variation of a home equity loan that provides credit over a draw period rather than as a lump sum. The homeowner doesn’t need to make principal repayments until the draw period ends, which can be years and a good way of managing large-scale home renovation projects.
- Personal loans and credit cards
Unsecured personal loans and credit cards may be an option if you want to borrow less than £25,000. You may pay a higher rate of interest but there is somewhat less risk when using unsecured credit instead.
- Home improvement loans
Home improvement loans can be secured or unsecured. The secured type may even be secured with a property or home equity. If you planned on taking out a second charge mortgage to pay for home improvements then this is another alternative to consider.
- Debt consolidation loans
And if you were planning to consolidate debts within a second charge mortgage, you should also be aware of debt consolidation loans. These are loans that are advertised to people who want to emerge debts together and you can even get bad credit debt consolidation loans.
How much can I borrow for a second mortgage to buy a second home?
If you are thinking about buying a second home as a buy-to-let investment or as a holiday home, you may also be wondering how much you can borrow on a second mortgage. But this is a different situation from what was described above.
You may be wondering how much you will be able to borrow within a second mortgage to buy a second home while you are still paying back your first mortgage on your first property.
First, you need to make sure you have a big enough deposit to buy the second home. Most lenders will require you to make a downpayment of at least 20% of the second home’s value in cash. If you are looking for a buy-to-let investment and are going to need a buy-to-let mortgage, then you usually need a larger deposit due to increased risk. You might need as much as 40% of the property value upfront.
The mortgage lender will then need to assess if the new mortgage would be affordable. Affordability checks are made by assessing your income against your debt, also known as your debt to income ratio. You will need to prove that you can afford the mortgage on a second property while also paying your current mortgage on your first home – and any other credit card or loan debts.
There are no stringent rules that every lender must follow. However, to take out a second mortgage on a second home successfully, you will probably need your total debt to be around 40% of your income or lower, including interest payments.
Can I use a second charge mortgage as a second home deposit?
Some people borrow against the equity in their home to help fund a second home purchase. They use the loan to contribute to the down payment of the second property. This can work, but the second charge mortgage will also be considered as a debt relative to their income.
If the debt to income ratio is too high because of the second charge mortgage then the individual could be rejected for a mortgage to buy the second home.
What is a second home mortgage calculator?
Mortgage lenders often include mortgage calculators within their website pages to help homebuyers work out what they would be required to pay by taking out a mortgage with them. It also helps them to compare against other mortgage deals elsewhere.
Recently, more lenders have provided these types of mortgage calculators for people looking to purchase a second home. The calculator includes a function so the potential buyer can input their existing debts, such as their monthly first mortgage payments. The calculator uses this information to determine what size of second mortgage they can get.
These calculators are not as accessible as standard mortgage calculators but they do exist. Just remember that they are based on representative APR only and you may not be offered the deal suggested within any calculation. Just like any financial calculator.
Read more before getting a second mortgage!
Before you start searching for mortgage lenders and interest rates, learn more about your options here at MoneyNerd. Our blog is packed with new guides and articles explaining everything you need to know about second mortgages.
Read our guides for free and seek money advice services or commercial mortgage advice for personalised support.