What counts as a short term second mortgage and how can you get one?
We discuss everything there is to know about taking out a second mortgage on a short-term basis here. From calculating your amount of equity to the risks and other common questions, everything is packed into our MoneyNerd guide.
How can I borrow against my home equity?
Homeowners who have accumulated home equity by making continuous mortgage repayments can borrow against their home equity if needed.
By securing listing their home equity as collateral within a credit agreement they may be able to access a larger loan than using unsecured loans, and they may unlock a more attractive interest rate to boot.
You can borrow against your home equity through various products, such as home equity loans, home equity lines of credit (HELOC), homeowner loans, secured home improvement loans and second charge mortgages. Some of these are the same product with a different name.
What is a second mortgage in simple terms?
A second mortgage, also known as a second charge mortgage, is a second mortgage added to a property with an existing first charge mortgage. The second charge mortgage is borrowed against some of the equity in your home and repayments are separate from the existing mortgage.
You can get either a long term and short term second mortgage, but you should only consider a lender authorised and regulated by the Financial Conduct Authority (FCA).
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How does a second charge mortgage work?
A second charge mortgage allows the homeowner to borrow against home equity. To work out how much you can borrow you’ll first need to calculate your equity, which means subtracting your remaining first mortgage balance away from the market value of your home. For example, someone with a £200,000 property with a £100,000 mortgage will have £100,000 (or 50%) home equity.
The loan amount is paid to the homeowner in one payment and then it is repaid over a fixed period of time through monthly repayments consisting of capital and interest. These monthly payments are separate from repayments on your mortgage used to buy the home in the first place.
But because second charge mortgages use home equity as collateral within the agreement, your home is at risk. If you fail to keep up repayments repeatedly the lender can force the sale of the property and use the money raised to pay off the debt. The amount of money raised from the forced sale will first pay off the first mortgage and then the second mortgage will be paid off.
Any remaining funds will be given back to the homeowner, but if there is not enough to repay both mortgage lenders then the individual could get into serious debt.
What is a short-term second mortgage?
Second charge mortgages can be repaid over different periods of time, based on how much the homeowner needs to borrow and the affordability of the loan based on personal circumstances.
A short term second charge mortgage is usually considered as such if the second charge mortgage is repaid within five years or less. On the contrary, some second mortgages can be repaid over 30 years or more.
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What is the shortest mortgage term available?
There are some second charge mortgages that have repayment periods lasting just one or two years. It’s highly unlikely that you can get a second mortgage with repayment periods shorter than one year.
If you take out a second mortgage with a short repayment period, it’s likely that you will be borrowing a smaller amount or have a high income that makes borrowing a larger amount affordable in the eyes of the lender.
Be aware of minimum second charge amounts
Some second charge providers require the homeowner to borrow a minimum amount against their home equity, often around £10,000. If you are using a short term second charge then you might need to consider this with some lenders. It could mean wanting to borrow less than this amount over the short term is only available with certain lenders.
Why do people get a short-term second mortgage?
Most people take out a second charge mortgage for the purpose of home improvements or debt consolidation. The same is true when taking out a short term second mortgage with some exceptions.
Because a short term second mortgage is likely but not exclusively to be for a smaller amount, you may not be able to complete large-scale renovations or consolidate larger multiple debts. It’s more common to see short term second mortgages used for smaller home improvement projects like redecorating or adding a new kitchen over building work.
But short term second mortgages don’t have to be used for just these two reasons. They’re also frequently used to pay for cars, holidays or to help out with medical bills or education costs.
Some homeowners may choose a shorter second charge mortgage to contribute finances to children or grandchildren looking to buy their first home. Or to fund an investment property with a buy to let mortgage.
Short term second charge for debt consolidation
If you have debts and arrears elsewhere, a short term second charge could be a solution. But it might not necessarily be the most advantageous debt solution.
For personalised advice and support dealing with debt, you can speak with a UK debt charity for free and in full confidence. One of the best options is Step Change UK – and they even have an online advice chat service through their website if you would prefer not to call.
The pros of a short term second mortgage
The benefits of using a short term second charge mortgage are:
- Using a secured loan can help you find competitive interest rates
- You may be able to borrow more over a short period due to using equity as collateral
- The money is paid upfront and can be used for any purpose
The risks of getting a short term second mortgage
The major risk of getting a short term loan is if an unexpected event affects your income and you cannot afford to repay the second charge mortgage. If you cannot pay the new mortgage your home may be repossessed and sold to clear the debt.
There is also a risk that the property valuation decreases for reasons out of your control, which in rare cases materialise into negative equity and related issues. You can mitigate this risk by borrowing against as little equity as possible in your situation.
Are short term second mortgages less risky?
Any second mortgage comes with a degree of risk, but it could be argued that a short term second mortgage is somewhat less risky than a longer second charge loan or secured loan using home equity as collateral.
When you take out one of these loans, the lender assesses affordability but cannot predict any unforeseen events that make the loan unaffordable, such as illness and injury preventing continued employment. When repayment periods are shorter there is a logical reduced risk of any unforeseen events making the loan unaffordable in comparison to long-term repayment periods.
Where to get a short term second mortgage
A second charge mortgage is available from the biggest banks and building societies across the UK, as well as specialist mortgage lenders. Sometimes these types of products go by other names, such as a home equity loan or secured homeowner loan. For this reason, it is important to search all of these terms when looking at your options online.
As mentioned earlier, only consider short term second charge mortgages from a lender that is authorised and regulated by the Financial Conduct Authority.
Will I be approved for a short term second mortgage?
To be approved for a short term second charge you will need to have more than the home equity to secure the agreement. The lender will need to make sure you can afford repayments over the shorter repayment period. The lender will analyse your income compared to all existing debts and the planned second charge mortgage.
Your credit score will also be consulted to see how you have handled debt repayment previously. If it becomes evident that you have struggled to manage your finances and have had arrears with other lenders then you may be rejected.
How to compare a short term second loan
To compare lenders offering a second charge mortgage or equivalent products (home equity loans, secured homeowner loans etc.) you need to search what they’re offering online.
You’ll be able to find representative rates, which are rates that at least 51% of applicants have received. So, don’t assume the rate advertised is what you are guaranteed. You may want to create a list or spreadsheet of your options, also taking note of additional fees if applicable.
These lenders sometimes have online calculators that allow you to enter the amount you want to borrow against home equity and the desired repayment period. This is a fast way to get predicted monthly repayments but again, a representative rate is used only and should not be seen as a quote.
Should I use a comparison website?
There are comparison websites online that will help you search options and provide representative rates. Sometimes these sites search the whole marker and on other occasions, they only provide results from a group of select lenders. Using these on top of your own research is worthwhile.
Alternatively, you could outsource all responsibility to a credit broker or professional finance services. There are fees if you want to go down this route, but it will make things easier, quicker and it could mean securing lower interest.
What are the best short term second charge mortgages?
Everyone looking for a short term second charge wants to find the best mortgage deal based on their needs and preferences.
What you’re offered from one mortgage lender could be different from what someone else is offered who wants the same loan amount over the same short term. Your credit rating and finances will affect the interest rate offered, and for that reason, there is no lender that is absolutely the best option for short term second charge mortgages.
Can I pay off my second charge early?
You might be able to pay off your second charge early – known as early repayment – but the definite answer can be found within your credit agreement.
However, if you can pay it off before the repayment period ends, you might have to pay an early repayment charge. An early repayment charge can be anywhere from 1-5% of the loan amount.
Can self-employed people get a short term second mortgage?
Just like how self-employed people can get a first mortgage to buy a property, they can also get second charge mortgages. The interest rates offered to self-employed people may be higher due to an added perceived risk to their income, but that’s not always the case.
Alternatives to a short term second mortgage
If a short term second charge mortgage is not for you, you may also want to ponder getting a:
- Unsecured personal loan
- Secured personal loan (secured with something else other than home equity)
- Home improvement loans (as unsecured or secured loans)
- Debt consolidation loan
- Credit card
- Refinance your first mortgage so you borrow more and just have one mortgage to repay.
Learn more before you take out a second mortgage now!
Before going ahead to compare your options, why not take the time to learn more about a second charge mortgage. Here at MoneyNerd, we have compiled a large catalogue of articles and guides discussing these products, covering them from all angles.
You could start by reading our latest post asking: can a second mortgage can be refinanced?