Getting a second charge mortgage

If you’re a homeowner, you can take out a second charge mortgage. In fact, you can take out as many mortgages as you can afford - provided you meet the criteria set out by your lender. We look at the reasons for taking out a second charge mortgage, the process and who is eligible.

If you’re a homeowner, you can take out a second charge mortgage. In fact, you can take out as many mortgages as you can afford - provided you meet the criteria set out by your lender. We look at the reasons for taking out a second charge mortgage, the process and who is eligible.

Mark Gordon
From the Mortgages team
9
minute read
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Posted 1 MARCH 2021

What is a second charge mortgage?

A second charge mortgage - also called a second mortgage - is a secured loan of over £1,000 taken out in addition to a first mortgage, against the equity in your property.

As the name implies, a second charge mortgage will mean that you have two mortgages on your home. It’s not an increase on the mortgage you already have, it’s a completely new loan. Just like any other mortgage you’ll need to factor in the costs and fees you’ll have to pay, like surveyor’s fees and arrangement or product fees.

While you have to be a homeowner to take out a second charge mortgage, you don’t necessarily need to live in the home you’re securing the loan against – it could be a buy-to-let property that you own.

What is a second mortgage?

A second mortgage is just another name for a second charge mortgage. You might have seen both names when looking for advice, but they’re the same thing.

A second charge mortgage isn’t the same as a mortgage for an additional property: find out more about getting a mortgage for a second home.

What’s the difference between a second charge mortgage and remortgaging?

Remortgaging is when you switch your existing mortgage to a new deal, either with your current lender or a different lender. It’s a way of finding a better deal, with better interest rates perhaps. You can also remortgage to get access to extra money – to pay for home improvements, for example.

A second charge mortgage is a new, separate mortgage. If you choose this route, you’ll have two loans on your home to pay back.

Why do people take out a second charge mortgage?

A second charge mortgage might help you cover a number of things including:

  • Home improvements
  • Debt consolidation - but remember, if you're consolidating debts like personal loans and credit cards, it means you’ll be switching from unsecured debts to one that could put your home at risk of repossession. Second charge mortgages can run up to 25 years, so you could also end up paying more overall.

Whatever your reason for taking a second charge mortgage, make sure you understand the costs involved and are confident you can afford them - your home or property may be repossessed if you do not keep up repayments on your mortgage.

How much will lenders be willing to offer on a second charge mortgage?

The amount you can borrow with a second charge mortgage depends on the equity you have in your property. The equity is the value of your home, minus the mortgage you owe.

The amount lenders offer can vary, but between 75%-100% of the equity is a good starting point. 

You’ll need to find out how much equity there is in your current home (see below) and decide how much money you’d like to borrow against it.

How do I calculate how much equity is in my home?

The equity is the value of your home minus the amount you owe on the first mortgage. For example, if your home is worth £200,000 and there’s £100,000 left on the mortgage, you’ll have £100,000 in potential equity for a second charge mortgage.

How does equity in the property affect a second charge mortgage?

When you’re applying for a second charge mortgage, your lender will look at the amount of equity you have in your home. Usually, the more equity you have, the better your chance of being accepted for borrowing a larger amount, with lower interest rates.

Are second charge mortgage interest rates higher?

Interest rates will often be higher on a second charge mortgage than on a first mortgage – and you need to think about this when you’re working out whether you can afford the repayments. But second charge mortgages can be cheaper than other kinds of borrowing. If you think you may struggle to meet the repayments, you might want to reduce the amount you want to borrow, remortgage (the interest rates can be lower) or decide not to take a second charge mortgage at all.

As an example, if you were on a five-year fixed rate mortgage with £200,000 left on it, you could add a second charge mortgage and raise some money (let’s say £20,000) using your home and the equity you hold to secure it.

You’d continue to pay off your existing mortgage, but then have the second deal on top of it for the extra £20,000, at a different rate, which is often higher.

Remortgaging your home will give you a better chance of getting a lower interest rate, but you might need to pay an early repayment charge on your existing mortgage.

When could a second charge mortgage be cheaper than remortgaging?

If you’re on a fixed rate deal and have to pay early repayment charges for remortgaging, taking out a second charge mortgage could be a cheaper way of raising money – even though the rate of interest might be higher.

If your credit rating has gone down since taking out the first mortgage on your property, remortgaging could mean you end up paying more interest on the whole of your outstanding mortgage. If, instead, you opt for a second charge mortgage, you’ll only have to pay the extra interest on the new amount you want to borrow.

If you can afford the repayments, you might prefer a second charge mortgage so you can choose a shorter loan period compared with borrowing more by remortgaging. Here, your existing mortgage might continue for 20+ years but the second charge mortgage for just 10 years – reducing the overall cost of the second loan.

You, your lender or advisor will need to work out which is the most cost-effective solution for you, based on your personal circumstances.

What happens if I want to move house and have a second charge mortgage?

If you want to sell your home, there’s a couple of options. If your first and second charge mortgages are ‘portable’, you’ll be able to switch them to your new home while staying with your current lenders.

Another option is to repay both mortgages when you sell your property and take out a new, single mortgage on the new property. Whether you could do this would depend on the conditions of both mortgages and any early repayment charges you’d need to make. Talk to your mortgage advisor about the best option for you.

What are the risks or downsides of a second charge mortgage?

While second charge mortgages can be useful, there are potential risks.

  • You’ll be paying the second charge mortgage in addition to your first mortgage, and risk losing your home if you can’t keep up repayments on either your first or second mortgage.
  • If you miss payments, or make late payments, this will go on your credit record and could make it more difficult for you to borrow in the future. You might also face late-payment fees.
  • Using a second charge mortgage to consolidate debts and pay off debts, like credit cards or a secured loan, could mean that you end up paying more in interest overall than you would if you’d paid off your original debts.
  • If you’re taking out a second charge mortgage with a long repayment period, you might have to continue to pay it into retirement. You’ll need to be confident that you can afford the payments at that stage of your life.
  • There are costs and fees to pay in addition to the amount you borrow for getting a second charge mortgage, so you’ll need to take these into account.

What are the alternatives to a second mortgage?

While a second charge mortgage can be useful if you need to raise a large amount of money quickly, there are a couple of other good options.

Remortgaging can raise money against the value of your home, as you can choose to remortgage for a larger sum than the outstanding mortgage. You could get a better interest rate by remortgaging than with a second charge mortgage, but you’ll need to consider any potential early repayment charges if you’re in the middle of a fixed-rate mortgage. If you’re not tied in though, or paying the early repayment charge comfortably makes sense, it can be a very good alternative.

homeowner loan could let you borrow larger amounts becasue you’re using your home as security that you’ll pay back the loan. However, if you don’t keep up with your repayments, your house could be sold so the lender can get back the money you owe.

Can I get a second charge mortgage to start a business?

You can potentially use the equity in your home that’s released by taking a second charge mortgage to start a company or grow your business. But before you consider taking out a loan against your property, there’s a few things to think about:

  • how much will starting your business cost?
  • is it likely to be profitable in the long-term?
  • if you go into business, will you still be able to afford your mortgage repayments (remember that you’ll have two)?

How do I get a second charge mortgage?

You can find out what your current lender would charge for a second mortgage, but you’re not tied to them. It’s also worth comparing to see whether you can get a better deal than they can offer.

When you apply for a second mortgage, the lender will want to see that you can afford to pay both your current and additional mortgage, so they’ll look at your income and outgoings. They’ll also want to see a list of debts you want to clear if you’re using the mortgage to consolidate debt. To help assess the risk of lending to you, they’ll also look at your credit record.

Compare second mortgage rates

You can look for a second charge mortgage deal with our comparison service. Just enter a few details, then we’ll do the searching for you and provide you with a list of options that suit your needs.

A second charge mortgage is a big commitment though, so it’s wise to get professional help. Our partners London & Country Mortgages Ltd (L&C)** can offer fee-free mortgage advice.

Go to L&C Mortgages

**London & Country Mortgages Ltd (L&C) are a multi-award-winning mortgage broker with over 20 years’ experience in helping people secure their perfect mortgage. Advice is provided by L&C, who are authorised and regulated by the Financial Conduct Authority (143002).

L&C are not part of Compare the Market Limited. Compare the Market receive a % of the commission that our partner London & Country earns. All applications are subject to lending and eligibility criteria.

L&C will not charge you a broker fee should you decide to proceed with a mortgage.

All applications are subject to status and lending criteria and are based on your individual circumstances. Applicants must be 18+ and a UK resident.

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