Second Charge Mortgages Explained

As an existing homeowner, you may need to raise some extra capital, perhaps for home improvements or debt consolidation. If you have equity in your current home, one option is a second-charge mortgage, sometimes called a secured loan, a homeowner loan, or a second mortgage.

In this guide, we have everything you need to know if you’re considering a second-charge mortgage, from how they work to what lenders offer them. We’ll also tell you how a broker can help you secure the best rates.

This is our main guide. For all our content on this topic, which may include an article about your specific circumstances, visit our dedicated second-charge mortgages page.

What is a second charge mortgage, and how does it work?

A second charge mortgage is a loan taken out using the equity in your home as security alongside and in addition to your first mortgage. It is a common form of borrowing for home improvements or renovations, debt consolidation, or other large expenditures.

Your first and second charge mortgages will normally be with different providers and at different rates and terms, so you will have two separate mortgage payments going out every month. The first charge lender takes priority if you default on your payments and your house is repossessed.

A second charge holder’s rights include being able to seize a property and force a sale to recoup the amount borrowed should the second charge mortgage fall into arrears.

Second charge mortgages have been regulated since 2016 as part of the Mortgage Creative Directive.

Eligibility criteria

Your eligibility for a secured loan will be assessed in a similar way to a first mortgage, so your lender will look at your financial circumstances, income and employment type, age, property type and any history of bad credit.

It’s a good idea to get copies of your credit reports before making your application just to ensure you don’t have any issues that could stop you from getting the money you need.

How your loan-to-value (LTV) impacts a second charge mortgage

Just like when you first buy a house and need a deposit, lenders won’t usually want to lend out 100% of the property’s value, as this would be considered too high a risk. Instead, they will cap your loan-to-value ratio (LTV), including your existing mortgage.

Let’s say, for example, that your home is worth £300,000 and you have £120,000 left on your mortgage. This would give you a current LTV of 40% and equity of £180,000. If a lender caps second charge borrowing at 75%, your overall borrowing could go up to £225,000, allowing you to borrow up to £105,000 as a second charge mortgage.

You would also have to meet the lender’s affordability criteria, which are determined by your income and existing financial commitments (outgoings), including your current mortgage. Lenders assess affordability to ensure that you can make your monthly repayments.

How to put a second charge on a property

While the process of getting a second charge mortgage is normally faster and more straightforward than a first mortgage, there are different factors to consider, and so it pays to do the groundwork before you finalise your mortgage application.

Speak to your current mortgage lender

Your current provider will need to agree to you taking a second charge against the property, and it’s not guaranteed, so before you do anything else, it’s best to speak to your lender and make sure that they are happy for you to go ahead. They will need to give permission in writing, so allow time for this to be processed, too.

Get your property valued

The amount you can borrow will be determined by the amount of equity you have in your home, and this can only be calculated with an up-to-date valuation. Once you have this figure, you’ll have a much clearer picture of the size of the loan you may be eligible for.

How a mortgage broker can help secure a second charge mortgage

Second charge loans are fairly specialised forms of finance, not always offered by high street lenders, so you’ll need bespoke, expert advice to ensure you’re getting the right product and the best rates. 

If you make an enquiry with us, our broker-matching service will connect you with the right advisor who specialises in this area. 

Your mortgage broker will then be able to help with the following: 

• Downloading and optimising your credit records: Your mortgage broker can help you access all your credit reports to ensure no inaccurate or outdated information could hinder your application.
• Finding the right lenders: They will be able to quickly identify the lenders who offer second charge mortgages, saving you time and, potentially, some money too. 
• Preparing your application: Your broker can help gather together all the necessary documentation, including ensuring you have the right permissions from your existing lender to proceed with a second charge loan.  

What would a second charge mortgage broker cost?

It depends on the complexity of the application, but typically, broker fees for a second charge mortgage should be the same as for a first-charge mortgage. So, most brokers will either charge a flat fee of between £500-£1,000 or between 1% and 2% of the mortgage amount, usually payable upon completion.

In certain cases, a broker may ask for part of their fee at different stages during the process, with a final payment once the loan is in place. Some brokers may not charge a fee and simply take a procuration fee (usually up to 0.5%) directly from the mortgage lender upon completion.

Remortgaging a property with a second charge on it

Remortgaging is possible in these circumstances, but it’s not always the simplest of processes. You should expect your pool of lenders to be significantly reduced as many of them will see a second charge as a potential red flag – they may be concerned that you’ve had issues with consolidating debt, for example.

The type of lender you’ve used for your second charge mortgage is also important, as some are associated with bad credit mortgage lending, which could be another warning sign.

That’s not to say it’s impossible; you’ll just want to use a broker with particular experience in remortgaging with a second charge who will understand the complexities. It’s worth keeping in mind, too, that having a second charge will impact how much you can borrow, as lenders will factor the existing debt into their affordability calculations.

Can you refinance a second charge mortgage?

Yes, just as you can remortgage a standard home loan, you can refinance your second. This might be a good move if interest rates have significantly dropped or your position has changed, so you may now be eligible for a better deal.

Just like standard remortgaging, you may be liable for fees if you repay your second mortgage early, and you’ll need to factor in additional costs such as lender fees. Talk to a broker if you want to find out more about this.

Advantages and disadvantages

Taking out a second charge mortgage is a big financial decision, and there are plenty of pros and cons to weigh up. Whether or not a secured loan is the right choice for you will depend on your circumstances, but make sure you’ve considered the following:

Alternatives to a second charge mortgage

Before committing to a second charge mortgage, it’s worth considering whether one of the alternatives might be a better fit for you. A broker can advise you on this and help you calculate the best option.

What interest rates to expect

Interest rates on second charge mortgages will usually be higher than on a first mortgage and vary significantly between lenders. This is because a second charge is a riskier proposition for lenders. If you’re unable to make repayments and end up having your property repossessed, they will only be second in line to be repaid.

The exact rate you’re offered will, of course, depend on several factors, including how much equity you have in your property relative to the loan amount and the debt outstanding on your first mortgage.

Working with a broker specialising in second mortgages will enable you to find the best possible rates for your circumstances. But, to give you a quick snapshot of the available rates, take a look at our table below.

Please note that the above rates are purely for example purposes. They were accurate at the time of writing but are subject to change. Speaking to a mortgage broker is the best way to find the most up-to-date deals.

Which lenders offer secured loans?

Second charge mortgage providers often aren’t the same people you’d go to for a standard first mortgage. Although some high street banks offer secured loans, they are often restricted to existing customers and do not always offer the best rates. You’re normally better looking at more specialist finance providers, who are prepared to take on a bit more risk.

Your broker may well have existing relationships with these lenders and be able to negotiate the best rates on your behalf. Some may only work through an intermediary or have exclusive rates available via brokers. Examples include:

Get matched with a second charge mortgage specialist

Taking out a second charge on your home is a big decision and not something to be entered into lightly or without expert advice – you could end up overpaying for a product that’s not the right fit for you. Fortunately, finding the right specialist broker doesn’t have to be a headache, thanks to our broker-matching service.

Give us a call now on 0330 818 7026 or make an online enquiry, and we’ll assess your circumstances and arrange a chat with the broker who has the right experience for you.