Getting a second mortgage

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

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

Tobi Owens
From the Mortgages team
4
minute read
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Posted 21 DECEMBER 2020

What is a second mortgage?

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

As the name implies, a second mortgage will mean that you have two mortgages on your home. While you must be a homeowner to take out a second 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 charge mortgage?

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

Why do people take out a second mortgage?

You might want to get a second mortgage for a number of reasons, these include:

How much will lenders be willing to offer?

The amount that you can borrow through a second charge mortgage depends on the equity that you have in your property. The sum lenders offer can vary, but between 75%-100% of the potential equity is a good starting point. 

You’ll need to determine how much equity is in your current home (see below) and decide how much money you’d like to borrow against that value.

Whatever your reason for taking a second mortgage on your home, make sure that you understand the costs involved and are confident you can afford them - failure to make payments on your mortgage may lead to you losing your home.

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

When you’re applying for a second mortgage, your lender will consider the amount of equity you hold in your home. Usually, the more equity you have, the better the chance of being accepted for borrowing larger amounts, and on lower interest rates.

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, a home worth £200,000 with £100,000 remaining on the mortgage will give you £100,000 in potential equity for a second mortgage.

Are second mortgage interest rates higher?

Interest rates will often be higher on a second mortgage – and you need to consider this when you’re working out whether you can afford the repayments. If you think you might struggle to meet the repayments, it may be wise to reduce the amount you want to borrow, remortgage (the interest rates can be lower) or opt out of taking a second mortgage altogether.

As an example, if you were on a five-year fixed-rate mortgage with £200,000 left on it, you could add a new second 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 a second mortgage can help you avoid early repayment charges and get the money you need.

What are the alternatives to a second mortgage?

While a second 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 also raise money against the value of your home, as you can choose to remortgage for a larger amount than you’d need for the home alone. You could get a better rate by remortgaging than with a second 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.

A personal secured loan. A secured loan can let you borrow larger amounts, by offering something significant as collateral. In this case, using your home would allow you to borrow a larger amount, as your lender will have the collateral to fall back on.

Just know that, if you’re unable to keep up with your repayments on any of these types of loans, your lender will be able to repossess your home. So, you should be very careful when considering your options.

Can I get a second mortgage to start a business?

The equity in your home that’s released by taking a second mortgage from some providers can be used to start a business. Before you consider taking out a loan against your property, consider these points:

  • How much will opening your business cost?
  • Is there a market for your business idea?
  • Is it likely to remain profitable in the long-term?
  • Will you need to hire an accountant, a bookkeeper or a solicitor?
  • If you go into business, will you still be able to afford your mortgage repayments (remember that you will have two)?

Compare second mortgage rates

You can look for a second 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.

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