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Second Charge Mortgage for People with Bad Credit

second charge mortgage for bad credit

For free and impartial money advice and guidance, visit MoneyHelper, to help you make the most of your money.

Can I get a second charge mortgage with bad credit? We’ve been discussing the possibility of getting a second mortgage with an unsatisfactory credit history. Keep reading to find out the answer and the important related details you need to know.

We start with a quick recap on second mortgages before looking at them from the perspective of having bad credit. 

What is a second charge mortgage?

A second charge mortgage is a type of loan available to homeowners who are still paying off their first mortgage but have built up enough home equity, usually through years of mortgage repayments. They may also be known as home equity loans, home equity lines of credit (HELOC) or secured homeowner loans. 

The second charge mortgage is taken out as a loan, secured against the equity in your property. For example, if you have £80,000 home equity, you might borrow against this for a loan of £30,000 or more. This will mean you now have two mortgages on the same property and will need to repay both with separate monthly payments. 

You won’t be able to borrow against 100% of equity, but you might be able to borrow as much as 80-85% of it. Those with a poor credit history may only be able to borrow against 60% or less of their equity.  

Because the second charge is secured with the equity in your home, the home may be repossessed and sold if you cannot keep up repayments. This might happen if you lose your job and cannot afford repayments on your mortgage as well as the second charge mortgage. 

If you want to get a second mortgage, only consider lenders that are authorised and regulated by the Financial Conduct Authority (FCA). 

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Are second charge mortgages bad?

Taking out a second mortgage can be an advantageous way for homeowners to access credit. Because they are borrowing against home equity as a secured loan, the second charge could enable them to borrow more at a competitive interest rate in comparison to other unsecured and secured loans. 

Some people consider second charge mortgages as a bad idea because it attaches more debt to your family home. It will. Having your home as security creates some risk that it will be seized if unforeseen events happen. Even if you avoid this – which most people usually do – it will take you longer to pay the debts against your home so you own the property outright. 

The bottom line is that securing other debts against your home can be beneficial to some homeowners requiring credit, but they may not always be the safest or best credit option on offer. 

Reasons to use a second charge mortgage

You can take out a second mortgage and use the loan amount for any reason you need. However, there is a trend in homeowners using second charge mortgages for two reasons. They are:

  1. Home improvements – Borrowing against large amounts of equity in the property can provide enough money to complete large renovations and improvements to your home, such as extensions, loft conversions etc. This can increase the property value and therefore supercharge your home equity again. 
  2. Debt consolidation – moving all your debts into one debt is possible through the process of debt consolidation. This is using a large loan – i.e. a second mortgage – to pay off multiple personal loans and/or credit cards. Managing repayments is easier when you just have to manage one each month, but it’s only worthwhile if you can save money with a lower interest rate in comparison to what was benignly paid. 

Other reasons to use a second mortgage are to buy nice cars or fancy holidays, or even to help fund a second home purchase, such as a holiday home in the UK or abroad, or as a rental investment. 

How to get a second charge mortgage?

Second mortgages are offered by specialist mortgage lenders, big banks and household-name building societies. They may not be advertised as second charge mortgages, but they could be advertised as home equity loans or secured homeowner loans. As mentioned earlier, only use financial services and products that are authorised and regulated by the Financial Conduct Authority. 

When you apply to take out a second mortgage, you may need to have your property valued so they can accurately calculate your amount of home equity. This is because to work out home equity you must subtract the existing first mortgage balance from the current market value of your home – not what you paid for it! Some second mortgages require you to take out a minimum loan amount. You’ll need enough equity to meet this minimum amount. 

Once you have applied by submitting all your personal finances and information about debts (including your existing mortgage), the lender will complete affordability checks to ensure you can afford the second mortgage along with other debts and essential living expenses. There is no fixed calculation to determine this, but all your debts should generally be below 40% of your income. 

The lender will also check your credit rating to uncover how you have handled other debt repayments in the past. Having a poor credit history can cause problems with your application and the end result. 

Can a lender refuse a second charge mortgage?

Just having enough home equity to borrow against is not always enough to get a second mortgage. A lender can refuse an application for a second charge mortgage if they believe you cannot afford the repayments or if poor credit history causes them concerns. 

This is why you should check your credit score before making an application for a second mortgage. You might have bad credit unknowingly – and you could try and improve it before applying

Can you get a second mortgage with bad credit?

It is still possible to get a second charge mortgage with bad credit. In fact, it is usually easier to get any secured loan with bad credit because the lender views you as less of a lending risk if the credit agreement includes an asset as collateral they can repossess if you stop making repayments.

Instead of having to go through a lengthy and uncertain process in the courts, they have an automatic right to seize the home and sell it in specific circumstances. This is what makes getting a second mortgage with bad credit easier than getting other personal loans with bad credit. 

Moreover, some lenders even offer bad credit mortgages, including bad credit second charge mortgages. These are just like the second mortgages explained earlier but are advertised specifically for people who have a less than satisfactory credit rating. The chances of being approved might be higher with these mortgages but the amount of money you can borrow or the interest rates offered could be higher. 

Second charge mortgage bad credit example

There are multiple options when searching for second charge mortgages for people with bad credit. Just one example is Simply Adverse. This lender, at the time of writing, is offering a second charge mortgage if you have a poor credit history. They are just one of a bunch of options and you should always do your own research before deciding where to apply. 

Using comparison websites can also help you cut through the noise and find the most suitable and beneficial second mortgage for your needs.

How to improve your credit score

If the reason you need to borrow money is not urgent, you may prefer to try and improve your credit file before applying. Here are some short and long-term methods of doing just that:

  1. Check your credit file and look for mistakes – you could be applying with an error on your file that will wrongfully hold you back. You can have this removed and your score increased. 
  2. Register on the electoral register – by doing this you verify your idea which might give your score a little boost.
  3. Reduce your credit utilisation – your credit utilisation is the amount of credit you are using on revolving credit, such as a credit card. You won’t have to get rid of your credit cards, but by simply borrowing less of your available balance you can improve your score over time. 
  4. Avoid other debts and arrears by budgeting effectively

What happens if you can’t afford your second charge mortgage?

If you have multiple missed payments on your second mortgage and no way of keeping up, the lender can seize the property and sell it to raise money and pay off your debt. This is why you should think carefully before agreeing to a second mortgage. 

If the home is repossessed and sold, the money raised will first be used to pay off the first mortgage lender. This lender is the priority. Once the first mortgage balance has been repaid, the second charge mortgage lender can then recover the debt owed to it. Any remaining money is given to the homeowner, while any underpayments keep the debt still alive, which could result in serious problems and even bankruptcy. 

There’s also a chance that the second mortgage lender will not pursue this action if they think your property has decreased in value and they won’t recover all of the debt. 

If you are having difficulty paying your second mortgage, you should speak with the lender as early as possible. Repossessing your home is usually not an ideal scenario for them either. They may be able to work with you to change repayments so you pay less but for longer. If this makes it more affordable and allows you to keep your family home, it’s worth picking up the phone. Debt advice is also available from exceptional UK debt charities

Choosing to refinance your mortgage instead

An alternative method of raising funds is to remortgage your existing mortgage and ask for more money borrowed against home equity. If you switch your existing mortgage to a different lender to do this, you may have to pay an early repayment charge on the first mortgage.

For example, if you have a £100,000 mortgage and £100,000 home equity (£200,000 home) then you could refinance your mortgage with your current or a different lender so you borrow extra against home equity. If you were to borrow against £35,000 equity, your new mortgage would be for £135,000 plus fees. 

Can you borrow more on a mortgage with bad credit?

Refinancing a mortgage is still possible if you have bad credit. Those with a good or excellent credit score may be able to borrow more against their home equity with a more appealing interest rate, but those with bad credit can still consider this option. 

FREE second charge mortgage guidance

If you’ve been one of the many people frantically searching “second charge mortgage bad credit” online, we hope this guide has been useful to you. 

More information on second mortgages can be found at MoneyNerd. We’ve just released a bunch of new articles on this topic, answering related FAQs.