Second Charge Mortgages Explained
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As an existing homeowner you may find yourself needing 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 second mortgage.
In this guide we’ve got everything you need to know if you’re considering a second charge mortgage, from the basics of how they work, through to which lenders offer them, and we’ll tell you how using a broker can help you secure the best rates.
In this article:
- What is a second charge mortgage and how do they work?
- Eligibility criteria
- How to put a second charge on a property
- How a mortgage broker can help secure a second charge mortgage
- Remortgaging a property with a second charge on it
- Advantages and disadvantages
- Alternatives to a second charge mortgage
- What interest rates to expect
- Which lenders offer secured loans?
- Get matched with a second charge mortgage specialist
What is a second charge mortgage and how do they 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. Second charge mortgages are a common form of borrowing for home improvements or renovations, debt consolidation or other large items of expenditure.
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 in the event of you defaulting on your payments and being repossessed.
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.
Second charge mortgages have been regulated since 2016 as part of the Mortgage Creative Directive.
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Your eligibility for a secured loan will be assessed in a similar way to a first mortgage, so your lender will look at your personal financial circumstances, your income and employment type, age, the property type and any history of bad credit. It’s a good idea to get copies of your credit reports in advance of making your application just to make sure you don’t have any issues that could stop you 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 value of the property, as this would be considered too high a risk. Instead they will set a cap on your loan to value ratio, or LTV, which will include 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%, this means your overall borrowing could go up to £225,000, allowing you to borrow up to £105,000 as a second charge mortgage.
Within this you would also have to meet the lender’s affordability criteria, which would be determined by your income and existing financial commitments (outgoings), including your current mortgage. Lenders assess affordability to make sure 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, it has 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 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 make sure you’re getting the right product and the best rates.
If you make an enquiry with us our free broker-matching service will be able to match you up 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 there’s no inaccurate or outdated information that 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 required, including making sure 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 involved with the application but typically, broker fees for a second charge mortgage should be the same as for a first charge. So, most brokers will either charge a flat fee of between £500-£1,000 or between 1%-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 at all and simply take a procuration fee (usually up to 0.5%) directly from the mortgage lender upon completion.
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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 a lot of them will see a second charge as a potential red flag – they may be concerned that you’ve had issues with needing to consolidate 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 and this could be another warning sign.
That’s not to say it’s impossible, just that you’ll want to use a broker with particular experience of 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’re able to 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 also refinance your second. This might be a good move if interest rates have significantly dropped or your position has changed such that 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 this is something you want to find out more about.
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 personal circumstances, but make sure you’ve considered the following:
Advantages of a second charge mortgage
You get to keep the existing rates on your first mortgage, as opposed to remortgaging, which gives you one new loan with a new rate. With current mortgage rates the highest they’ve been in a long time, this is one of the key benefits of a secured loan over a remortgage.
No early repayment charges (ERCs) on your existing mortgage.
You can borrow more and over a longer term compared to an unsecured loan.
You get to keep the original term on your existing mortgage.
If you opt for a product with no early repayment penalties you may be able to clear the debt more quickly and avoid interest.
Disadvantages of a second charge mortgage
You will need permission from your existing lender.
Interest rates will be higher than a standard mortgage.
You’ll be making two mortgage payments a month, so your day to day finances will be impacted and your home is at risk if you don’t keep up.
There may be fees to include as additional costs, including lender, application and broker fees.
If you leave yourself with little equity in your home you risk house prices falling or being left with a small deposit for another property should you decide to sell.
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Alternatives to a second charge mortgage
Before you commit yourself 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.
- Remortgaging - If you aren’t subject to ERCs and can remortgage at a competitive rate then there are benefits to having all your mortgage debt in one place.
- Further advance on existing loan - If you’ve managed your current mortgage well and your financial position is strong then your existing lender may be open to increasing the borrowing on your current mortgage under the same terms.
- Unsecured personal loan - These are good for smaller amounts and much quicker to organise than a secured loan, with no need for the second charge. Most personal loans are capped at £25,000 although you may be able to go up to £50,000 if you borrow through your own bank.
What interest rates to expect
Interest rates on second charge mortgages will usually be higher than on a first mortgage, and can vary quite 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 who specialises in second mortgages will enable you to find the best possible rates for your circumstances. But, to give you a quick snapshot of what rates are available take a look at our table below.
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Last updated September 2023
Please note that the above rates are purely for example purposes, 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 not always 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:
- Pepper Money offers secured loans from £10,000 to £1 million, repayable over 3-30 years. They offer flexible, penalty-free overpayment options so you can clear your debt early if you’re able to.
- Step One Finance will consider loans from £10,000 to £200,000 over 6-30 years. You can borrow up to 95% LTV, including the amount of your current first mortgage.
- West One Loans offers loans up to £500,000, subject to a maximum LTV of 80% and a loan term of 3-30 years. Loans are available to employed, self employed and retired applicants, so long as the loan term finishes before you reach the age of 85.
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 free broker matching service.
Give us a call now on 0808 189 2301 or make an online enquiry and we’ll take a look at your circumstances and arrange a chat with the broker that has the right experience for you. It’s free of charge and there’s no obligation, so you have nothing to lose.
Speak to a Second Charge Mortgage expert
Maximise your chance of approval with a dedicated specialist broker
Yes, and they have been since 2016. So, a second charge loan falls under the exact same FCA rules and regulations as a first charge loan.
Securing a second mortgage is a much quicker process than an initial mortgage, so you won’t be waiting months. Some lenders claim to be able to process secured loans in a matter of days, but realistically you should allow 3-4 weeks.
Once the debt has been repaid in full then your lender should automatically notify Land Registry and the charge will be removed. If you have any problems with a repaid loan that hasn’t been removed, contact the Land Registry directly and they will be able to investigate and contact the lender on your behalf.
If you purchased your home through the Help to Buy equity loan scheme then you effectively already have a second charge on your property as you have a mortgage and a separate government loan. There are lenders who will be willing to consider a third charge – your broker will be able to research your options for you.
Yes, you can, you’ll just need to pay off the loan when you do. Sometimes a lender will allow you to transfer the second charge to a new property, so talk to your broker if this is something you want to do.
No, you don’t need to have legal support for a second charge mortgage, but it is worth taking some form of expert advice before you decide it’s the right option for you, ideally via a mortgage broker who specialises in second charge mortgages.
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