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A Guide to Second Charge Mortgages

No impact on credit score

Pete Mugleston

Author: Pete Mugleston - Mortgage Advisor, MD

Updated: August 13, 2021

Getting a foot onto the property ladder is a big step for many of us. But, once we’re in our new home, it’s natural to want to make changes and renovations which, in some cases, can cost quite a lot of money.

One of the most popular ways to raise finance for home improvements is by taking out a 2nd charge mortgage loan on your property.

This guide takes a deeper look at 2nd charge lending, providing all the details you need so you can make an informed decision as to whether this option is right for you.

What is a second charge mortgage loan?

A second charge mortgage is an additional amount of lending with a different lender to whom you have your main mortgage, over and above the original (or ‘first charge’) mortgage, put in place to complete the purchase of your home.

Second charge mortgages are secured loans, often referred to simply as second mortgages or homeowner loans. Second charge loans are available in the U.K for anyone who owns a property and has an existing mortgage in place.

A traditional mortgage is a secured loan which uses the property you’re buying as security for the lending. The term ‘charge’ is used to describe the registration of this loan against the property’s title.

Should an event occur which requires a lender to sell the property and reclaim their debt, the first mortgage takes precedence over the second charge lending.

Both mortgages stand alone from each other as separate lines of credit. This is an important distinction between remortgaging where any supplementary borrowing is added to the original amount creating a new, larger, mortgage rather than two.

How do they work?

Second charge mortgages are regarded as the main alternative to remortgaging as a means to raise additional finance by taking advantage of the equity within a property you currently own and have an existing mortgage attached.

The main reasons why someone would look to take out 2nd charge finance is:

  • Renovations and home improvements.
  • Debt consolidation.
  • Emergency capital requirement (family loan etc).

Second charge funding is available on both an interest-only and repayment basis with lending amounts from as little as £1,000.

There’s no requirement to use the same lender for both a first and second mortgage, therefore, you can have different providers with different loan terms and interest rates for each.

A 2nd charge mortgage is a secured loan on a property you own, however, it does not necessarily have to be on your main home. If you’re a landlord, you can apply for a second charge loan on one of your rental properties, if sufficient equity is available.

If you’re interested in getting a second charge mortgage make an enquiry and we can arrange for an expert to contact you and discuss further.

Second charge lending criteria

Whereas the lending criteria for your original mortgage is based on a number of factors – size of deposit, affordability, credit rating – with second charge funding any agreement is based initially upon the amount of equity within your property.

So, for example, if you own a property worth £250,000 with an existing mortgage of £100,000 you have £150,000 equity available to raise finance on a second charge basis.

The more equity you have in your home, the more you will be able to borrow. If insufficient equity exists then any second charge mortgage application will not get off the ground.

Will I need to arrange a valuation on my property?

Yes. A key part of the process for a second charge mortgage will involve a valuation on your property in order to accurately assess the amount of equity available.

From this information a lender can decide how much you’ll be able to borrow against their overall loan-to-value (LTV) parameters.

So, if a lender’s maximum LTV equates to 80% then based on the example above you could borrow up to a maximum of £200,000 (80% of £250,000) which means you could borrow an additional £100,000.

The next steps in the second charge mortgage process

Once this has been completed, a lender will then be able to look at other factors before making a final decision such as:

The same affordability assessments and criteria are used by a lender for 2nd charge funding as is adopted for first mortgages with both loans and repayments taken into account.

For example, if a lender uses an income multiple of 5x salary, they will base this on the combined amounts of the remaining balance on the first mortgage and the second mortgage.

The same principles apply to a lender’s affordability stress-testing. If there is insufficient evidence of adequate disposable income to cover the repayments for a second charge mortgage, on top of your existing commitments, they may not be able to approve the new lending.

You will also need to apply for permission, or “consent to 2nd charge” from your existing mortgage provider and some lenders are more willing than others to do this. If you are considering getting a 2nd charge mortgage you should approach your mortgage company first to ask if they will allow it.

Can I get a second charge mortgage with a bad credit record?

It’s certainly possible to get a second charge mortgage if you have bad credit. As second charge loans are secured against a property, some lenders may be more willing to consider an application for this type of finance if you have a bad credit record, rather than for an unsecured personal loan as they would have no fallback to reclaim funds in the event of a default.

It is still possible to get a mortgage, whether on a first or second charge basis, with a history of bad credit . If you’d like to know more about how we can help, get in touch and we can ask a bad credit mortgages expert to discuss this in more detail with you.

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Advantages and disadvantages

There’s a number of clear benefits with taking out a secured loan or second charge mortgage but there are a few risks attached too, as outlined in more detail below:

Benefits of second charge mortgages

The main benefits of a second charge mortgage are:

  • Potentially cheaper than remortgaging.
  • Avoiding early repayment fees on existing mortgage.
  • Better/longer terms available than unsecured lending.
  • Flexible terms for self employed.
  • Can help rebuild your credit record.

Of all the above benefits, the key advantage of a second charge mortgage is the ability to raise finance using the equity in your home without disturbing your existing mortgage terms.

This is particularly beneficial if you have a terrific rate for your original mortgage and have no desire to break these terms by remortgaging this debt.

Also, if you’re looking to raise money fast, second charge loans are usually quicker to put in place than other alternatives due to the security available for prospective lenders.

Potential risks

  • Higher repayments could put your home at risk.
  • Could work out more expensive in the long run.
  • Fall in property value / downturn in the property market.

By putting a second charge on a property and increasing your overall borrowing, you take the risk of placing more pressure on your homeowner status. This can be avoided by ensuring you can comfortably afford any increase in your monthly financial commitments.

How to put a second charge on a property

As access to this form of lending would be via a respected finance provider and using professional legal services, the responsibility for taking a second charge on a property and ensuring it’s correctly registered usually rests with those entities.

However, if you’d like to understand how to register (or remove) a second charge on a property, HMRC can provide detailed guidelines via their main website.

You can start the ball rolling by talking to one of the second charge mortgage experts we work with. They will be able to answer your questions and help you find a lender with the best terms for your situation.

Make an enquiry for a free, no obligation chat. All of the experts we work with are whole-of-market brokers with access to every lender across the UK.

Get matched with a second charge mortgage expert

A second charge mortgage can be an attractive alternative to both remortgaging and unsecured loans as a means of raising finance using the equity within a property you already own, but professional advice is recommended before you apply for one.

If you’re keen to find out more about how the process works for second charge loans then why not get in touch with us. We offer a free broker-matching service that will take your needs and circumstances into account to pair you up with the perfect second charge mortgage broker. This will be an advisor we’ve handpicked for you, based on their track record of helping customers just like you!

The secured loan experts we work with can offer the expert knowledge and advice you need, tailored to your own circumstances. Call us on 0808 189 2301 or make an enquiry and we’ll set up a free, no-obligation consultation between you and your ideal broker today.

FAQs

Can a second charge mortgage prevent me from moving house?

It shouldn’t stop you from selling your house, but you will need to pay off the second charge mortgage or transfer it to your new mortgage. To do this, you’ll need to find a lender who will lend you the right amount of money for the new property and take on the second charge mortgage too.

Can a second charge holder force a sale if I fall behind with repayments?

Yes, it’s possible. The rights of a second charge holder includes being able to seize a property and force a sale in order to recoup the amount borrowed should the second charge mortgage fall into arrears.

Whilst a second charge holder doesn’t need to seek the permission of the first charge holder to take this action, in the event of a property sale, the primary lender will still be repaid first.

How long does the second charge mortgage process take?

They are usually much quicker than a first-charge mortgage, and under the right circumstances, it may be possible to complete the application process in a matter of days. In most cases, you’re unlikely to wait longer than a few weeks to get your funds.

Can I get an interest-only second charge mortgage?

Yes, it’s possible to get a second charge mortgage on an interest-only basis. One of the main benefits of doing this is that your monthly payments will be lower.

However, with any interest-only arrangement, you need to ensure you have a viable repayment vehicle in place in order to repay the whole capital amount at the end of the term.

What happens in divorce if you have a second charge on a joint-owned property?

In the same way that you will need to deal with your mortgage arrangement, the second charge will have to be accounted for and either repaid in full or maintained.

If the second charge mortgage is in joint names, it is vital that the repayments are kept up by both parties, otherwise you could risk losing your property or end up with bad credit, even if you maintained your own payments.

Depending on how you divide the property, the second charge mortgage will need to be either repaid, continued or swept up in a remortgage, if one of you decides to keep the mortgage on in your sole name.

Read more about buying someone out of a mortgage.

What happens when a second charge is ‘postponed’?

A deed of postponement is a legal document required in the event of a second charge mortgage needing to be postponed in favour of a new charge being put in place.

It is generally used when a homeowner is attempting to remortgage their total borrowing on a property they own. The postponement allows the new charge to be legally accepted as the first charge.

Why are second charge mortgages an attractive means of finance for people who are self-employed?

Self-employed individuals can traditionally face more scrutiny from lenders regarding their income streams as they generally tend to be more irregular than that of an employed person with a regular guaranteed salary.

As second charge mortgages are secured loans, this aspect tends to make them more appealing for both self-employed and providers rather than unsecured finance or remortgaging.

Are second charge mortgage rates more attractive in London than elsewhere in the UK?

No, not at all. The competitiveness of provider rates are not determined by the location of a property. A second charge mortgage rate should be no different in Scotland, Northern Ireland or Wales as it would be in England.

The amount of equity available to a homeowner is usually a key factor. However, this has no real correlation with where a property is located.

Can I take out a second charge mortgage on a Help to Buy property?

It may be possible, however, it would depend on the amount of equity available in the property, taking into account the percentage within the property which is still government-backed.

Additionally, if you still have the Help to Buy Equity Loan against the property, this will be registered as a second charge against the land registry so the new mortgage would actually be a third charge. This would mean you will probably require permission from both your existing mortgage provider and the Help to Buy scheme for permission for your new loan.

Is a further advance a second charge?

A further advance is when you borrow more money on the same or different terms from your mortgage lender. A second charge is a separate loan entirely.

Are second charge loans available as an offset mortgage?

Offset mortgages are typically available for primary lending when you’re looking to make an initial purchase of a property.

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About the author

Pete, an expert in all things mortgages, cut his teeth right in the middle of the credit crunch. With plenty of people needing help and few mortgage providers lending, Pete found great success in going the extra mile to find mortgages for people whom many others considered lost causes. The experience he gained, coupled with his love of helping people reach their goals, led him to establish Online Mortgage Advisor, with one clear vision – to help as many customers as possible get the right advice, regardless of need or background.

Pete’s presence in the industry as the ‘go-to’ for specialist finance continues to grow, and he is regularly cited in and writes for both local and national press, as well as trade publications, with a regular column in Mortgage Introducer and being the exclusive mortgage expert for LOVEMoney. Pete also writes for OMA of course!

Read more about Pete

Pete Mugleston

Mortgage Advisor, MD

FCA disclaimer

*Based on our research, the content contained in this article is accurate as of the most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The information on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs.

Some types of buy to let mortgages are not regulated by the FCA. Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.

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