Pete Mugleston | Mortgage AdvisorPete has been a mortgage advisor for over 10 years, and is regularly cited in both trade and national press.
Updated: 6th September 2019 *
Second charge mortgages have risen in popularity over the past few years, with lending up by 24% in February 2019. However, if you’re wondering whether to get a second charge loan or remortgage your property to raise funds, or if you can remortgage with an existing second charge loan in place, you’re not alone.
It’s always a good idea to understand your options before making a big financial decision, which is why it’s recommended that you speak with a mortgage expert first. They can give you tailored advice and suggest lending options to suit your personal circumstances.
In this article, we will be covering the following:
What’s the difference between first and second charge mortgages?
‘First charge’ refers to the primary mortgage taken out on a property. A ‘second charge’ mortgage (not to be confused with a ‘further advance’) is a loan typically lent on top of the first charge that allows you to take out funds using the equity you have in your home.
Lenders are typically more wary of second charge than they are with first charge mortgages due to the added complications in the event of repossession. As such, interest rates are typically higher.
But the quicker you can pay off a second charge loan, the less interest you’ll have to pay. For example, if you took out a second charge loan for £80,000 with an interest rate of 3.5% for 5 years, you will pay back £1,455 a month, or £87,320 in total. But, if you took out the same but over 25 years, you would only pay back £400 a month, but £120,150 in total.
What’s more, first charge mortgages will always be prioritised before a second charge. So, when a property is sold, the first charge mortgage will be cleared in full before any funds go towards paying off the second charge.
There are many reasons why a second charge loan might be a more suitable option for someone over a first charge mortgage. We go into more detail below.
Should I get a second charge mortgage or remortgage my property?
Remortgaging can be financially beneficial if you need to raise funds against your property, though whether this type of finance or a second charge mortgage is suitable for you depends on your personal circumstances.
It may be a good option if you’d like to find a better deal once your fixed introductory rate on your first mortgage (typically between two to ten years) has expired, though fluctuating rates may make this an unsuitable option, depending on the market conditions.
In some cases, a second charge mortgage may be a more suitable option if:
Your financial circumstances have changed
If, for example, your credit rating has gone down since taking out your first home loan, remortgaging could mean you end up paying more interest on your entire mortgage. With a second charge mortgage, you only pay extra interest on the additional amount you’re borrowing.
Remortgaging may be more expensive
Remortgaging can be costly. When you remortgage, you usually have to pay an early exit fee plus any legal and surveyance costs, so it’s important to calculate whether the savings you make by switching will be worth it.
Struggling to calculate whether you’d be better off remortgaging or taking out a second charge mortgage? Contact us for a no-obligation chat with an expert.
Can I remortgage with a second charge loan already in place?
Some people want to know whether they can remortgage their property with a pre-existing second charge loan already in place. In short, yes, it may be possible.
Theoretically, having a second charge does not prevent you from switching your first charge mortgage to a new deal, but it can be complicated and may not be the most suitable option for some.
As previously mentioned, lenders are typically more wary of second (or third) charge mortgages. Others may be unable to offer those with a second charge with the option to remortgage due to technical capabilities when capturing the involvement of other lenders.
Lenders who are willing to offer a remortgage to borrowers with a second charge loan often carry out affordability checks to ensure you can comfortably afford the new product after second charge payments have been deducted.
If someone is remortgaging to a new lender, there will just be one new first charge debt, sufficient to pay off the old first and second charge. The existing second charge mortgage wouldn’t continue
Can I refinance a second charge mortgage?
Yes, it is possible to refinance your second charge mortgage if you’ve found a better deal or want to free up some cash, though you may find it trickier compared to refinancing a first charge mortgage due to the associated risk.
However, provided you have good credit, stable income and have been consistent with your repayments, it should be possible.
If the interest rates on your first mortgage are also significantly higher than current rates, you could also consider combining your first and second mortgage into one lump payment.
Can I release equity by taking out a second charge mortgage?
Yes! Home equity represents valuable savings, but it can also serve as a handy tool if you fall into unexpected financial difficulty.
You may want to release equity by taking out a second charge mortgage for a number of reasons.
Second charge mortgage for home improvements
A common reason many homeowners choose to release equity from their property is to carry out home improvements, such as repair work as a result of storm damage or other natural disasters.
Second charge mortgage for an extension
Alternatively, you may decide to take out a second charge mortgage for an extension. Adding more space to your home could also increase the value of your property.
Second charge mortgage for debt consolidation
Taking out a second charge mortgage for debt consolidation may be financially beneficial if you have a number of other debts (usually unsecured) which you’re charged a high level of interest on, such as credit cards, store cards or payday loans.
Essentially, the funds secured against your home may be used to pay off multiple high-risk debts so you’re left with one single, larger debt (in this situation, the second charge loan) with a more favourable payoff term.
Second charge mortgage to buy a new house
You may consider releasing equity if you’re looking to raise funds quickly or get your hands on a large amount of cash. For example, you might take out a second charge mortgage to buy a new house or invest in a buy to let (BTL).
Where a secured loan is used to buy property, borrowers can usually apply for up to 95% loan to value (LTV) on residential properties and 85% LTV on BTLs. Terms may vary for higher risk applicants. Contact us for further advice on this.
Speak to a second charge mortgage specialist
To find out more about whether a second charge mortgage or remortgage is right for you, get in touch. The experts we work with will assess your situation and advise you which is the most suitable product for your circumstances.
Call us for a free, no-obligation chat on 0808 189 2301 or make an enquiry and a member of the team will be in touch shortly.
*Based on our research, the content contained in this article is accurate as of 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 info 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.
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 here...