Second Mortgage advice, Guidance and Tips
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Before you get a second mortgage in the UK, it is highly recommended to use second mortgage advice services.
MoneyNerd has provided a concise round-up of the key things to know about before using a second charge, and we discuss where you can get second mortgage advice in the UK, sometimes for free!
What is a second charge mortgage?
A second charge mortgage is a loan taken out against a property. It is called a second charge because the first charge is the initial mortgage used to help buy the property. Whereas the first charge mortgage helps purchase the home, the second charge is a separate loan secured by the property. Thus, if you have a first charge and a second charge, you will make separate monthly repayments on these debts.
Examples of second charge mortgages are home equity loans, HELOCs or a homeowner secured loan. Only consider any of these products when they are provided by lenders that are authorised and regulated by the Financial Conduct Authority (FCA).
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Second charge vs second mortgage
Sometimes a second charge mortgage is also known as a second mortgage for short. However, this can cause some confusion because someone buying a property with a first charge mortgage may decide to buy a second property with a second first charge mortgage. You can usually differentiate between them based on the context of the discussion.
Where can you get a second mortgage?
You can take out a second mortgage from a wide range of lenders, including mortgage providers, banks and some building societies. Getting any type of secured loan is a big decision and it is highly recommended to get second mortgage advice first.
The pros of getting a second mortgage
The benefits of using a second charge are:
- You have the potential to borrow more than with other secured loans and unsecured credit.
- They have competitive interest rates for people with good finances and credit history.
- You can avoid early repayment charges that are likely to apply if you remortgage your existing first mortgage (to borrow more).
Is a second mortgage risky?
Getting a second mortgage does have an element of risk. Second mortgages are secured against the equity in your property, meaning failure to repay as agreed can result in repossession.
If you do not keep up repayments on the second charge, the lender can seize and sell your home. The money raised must first be used to repay the first charge mortgage, and then used to pay off the second charge debt. Any remaining money is handed back to the homeowner.
You can mitigate the risks associated with taking out a second charge mortgage by borrowing less and searching for the best deals with lower interest.
What can a second charge mortgage be used for?
Second charge mortgages do not come with spending restrictions. The homeowner can spend the loan amount as they wish, on one or multiple purposes. They are most often used to raise funds for home improvements. This includes everything from redecorating or a new kitchen to changing home layouts by knocking down walls or adding a home extension.
Other reasons to use a second mortgage include but are not limited to:
- Debt consolidation
- Car purchases
- Education and medical bills
- To invest in a buy-to-let property
- Buying a second home abroad or any other new property
- To help family and friends experiencing money or debt problems
Is a second mortgage a good idea?
A second mortgage can be a good idea for some homeowners when they need to raise money for a specific purpose. It’s an especially good idea when using the loan to improve the property because this can increase the property’s value and simultaneously the homeowner’s home equity. These types of secured loans can provide larger loan amounts not available through alternative credit options.
However, second mortgages are not always a good idea. Having an existing mortgage and a second debt attached to a family home can be stressful and risky. This is why you should seek second mortgage advice before making any moves.
What is the downside of a second mortgage?
One of the big downsides of using a second charge is that it significantly increases the debt attached to your family home, making it take longer for you to pay off your two mortgages and own the property outright.
When is a second mortgage not a good idea?
A second mortgage may not be a good idea if you do not need significant credit. There may be less risky credit options, such as unsecured credit that can provide you with the same loan amount. For example, if you want a small amount to buy a new bathroom, there could be advantages of using an unsecured personal loan or unsecured home improvement loan, instead of attaching more debt to your property.
How much equity do I need for a second mortgage?
Second mortgages are usually advertised with a minimum loan amount. This amount is the minimum loan you must take out if you decide to use a second charge. Sometimes the minimum amount can be as low as £3,000 and in other times it can be as high as £10,000.
You’ll require enough equity to be able to take out the minimum amount – at least. This doesn’t mean you need £10,000 to take out a minimum £10,000 loan. Because lenders don’t allow you to borrow against all the equity in your home, you’ll require more than the minimum amount.
For example, if you are only offered a 50% Loan to Value (LTV) ratio, then you would need £20,000 equity to meet a £10,000 minimum loan requirement.
Note: Home equity is calculated by taking away your remaining mortgage balance from your property’s up-to-date market value.
Is a second mortgage more expensive?
The interest rate on a second charge is usually higher than the interest you pay on an existing mortgage, even if you have a good credit score. But the interest rate is not the only expense attached to a second mortgage.
You might need to pay loan or admin fees within the mortgage repayments, and you could have to pay closing costs at the end of the loan, equating to 2-5% of the total loan. And if you decided to repay the total balance early, there is likely to be an early repayment charge at a similar expense to closing costs.
Where can I get second mortgage advice?
Second mortgage advice is available through commercial finance companies, such as generic finance advisors and specialist mortgage advisors. If you are considering one of these loans as a method to consolidate debts, you might want to speak to debt management companies.
Take note that these are commercial businesses operating to make a profit. Their services will come at a cost. If you decide to use commercial second mortgage advice, always ensure that the company you land on is authorised and regulated by the Financial Conduct Authority.
Free second mortgage advice is available through money advice groups, some of which are run through local charities and community groups. If you cannot find any, consider speaking with a debt advice charity that may be able to help, such as National Debtline or Step Change.
Do I need second mortgage help?
It’s not compulsory to get second mortgage advice before taking out one of these loans, but it comes highly recommended. By speaking with an informed professional, you may learn about alternative options to consider that could provide better terms for your situation and even less risk.
It’s often the case that personal situations and finances dictate what the best decision is. Only by receiving a personalised assessment can you understand what credit option can benefit you the most.
Free second mortgage advice and tips
More free tips and help is at your fingertips here on MoneyNerd. We have countless more posts and guides discussing the prospect of having two mortgages and the key considerations. All our content is free and written to make sense of what can be confusing financial products.