Pete Mugleston | Mortgage AdvisorPete has been a mortgage advisor for over 10 years, and is regularly cited in both trade and national press.
Updated: 27th August 2019 *
We get many enquiries from people looking to see if they can afford to take out a second charge mortgage. This type of secured loan can be a viable alternative to remortgaging because it allows you to raise capital from your property without refinancing your primary mortgage.
A second charge mortgage may also provide more benefits to individuals in certain circumstances. Because the loan is secured against the property and therefore the risk is reduced, a second charge mortgage could be a cost-effective way for people with poor credit history to borrow. It can also be used to pay off outstanding debts, to supplement an income, or used to renovate the property itself.
In this article we'll be looking at the following:
It all comes down to your personal circumstances. In order to assess your affordability for a second charge mortgage, you first need to decide on how much you want to borrow. The maximum amount you can borrow depends on the positive equity you have on your property.
Lenders are also keen to see that you can afford to service the second charge mortgage on top of your existing mortgage, so they will conduct an affordability assessment. They will assess the borrower's income against their expenditure to see if they are able to meet the payments for the loan amount.
Lenders may even send someone to value your property and/or conduct a credit search, though most second charge applications are much quicker and easier compared to taking out a primary mortgage.
The exact rate you’ll be offered depends on your situation. If you have a clean credit history and have a lower loan to value (LTV) mortgage on your property, you will be considered lower risk by most lenders and therefore likely to secure a better rate. But if you have a poor credit history and have a higher loan to value against your property, you will probably be offered a higher rate.
Exactly how much you will be paying each month, and overall across the mortgage agreement, will also come down to the term length you choose. Spreading your payments out over a longer period will mean payout out less each month, but more in interest overall.
The table below illustrates how payments on a second charge mortgage can differ depending on the term length. This example is based on a £100,000 loan taken out on a capital and repayment basis with an interest rate of 3.5%.
In addition to the debt repayments and the monthly interest, there may also be additional costs and fees to factor into the overall cost of your second charge mortgage including:
Legal and survey fees
You may also have to factor in early repayment charges. See the section below for more details.
For a better idea of how much a second charge mortgage will cost, speak to a specialist. They'll be able to find you the best rate possible based on your circumstances.
Payment options for a second charge mortgage
You can choose to arrange your second charge mortgage payments over a specified time. With a secured loan, you may be able to get a longer term at a better rate because there is more financial security for the lender.
As previously mentioned, a shorter term length means higher monthly repayments, you will pay less interest overall. If you decide to opt for a second charge mortgage with a longer term, your monthly payments will be less, though you will end up paying more in interest over time.
It's also worth noting that second charge mortgage payments take second place in priority of your main mortgage payment (the first-charge debt), so if you fail to meet these payments, you could have to pay back the loan using a portion of your property.
To put this into context: If someone defaults on their 2nd charge loan repayments, the lender can potentially take action to repossess the property. If this happened, the 1st charge lender’s debts take priority, so will be repaid first from any sale proceeds. The 2nd charge lender will be repaid from whatever funds are left after that.
Early repayment for a second charge mortgage
You may be able to make early repayments for all or part of your second charge mortgage, but this varies for each loan. Your rights for an early repayment depends on the terms and conditions laid out in the credit agreement.
Secured borrowing often has penalties if you overpay or make early repayments within the agreed tie-in period. However, if you think that you will be able to pay back the loan sooner, then talk with a mortgage advisor today. The experts we work with can help you with your early repayment queries.
The APR for a second charge mortgage
An annual percentage rate (APR) calculates the average annual cost of a loan over the period of your debt and is expressed as a percentage. These rates take into consideration the interest charges of the loan plus any additional fees (such as broker or arrangement fee) you will have to pay on top.
The mortgage experts we work with will first compare the actual rates of interest and fees from secured loan products to calculate what you will pay, as this may provide a more accurate figure compared with an APR. They know which loan providers demand higher arrangement fees and charges. Speak with a mortgage expert today for free, impartial advice.
How much can I borrow for a second charge mortgage?
With a second charge mortgage, the amount you can borrow depends on the positive equity you have on your property.
For example, if your property is worth £250,000 and you have a first charge mortgage with £150,000 left to pay, then technically £100,000 is the maximum amount you can borrow.
How are second charge mortgage quotes generated?
There are many variables to generating a second charge mortgage quote, and all quotes generated will be completely bespoke. A lender will look at the loan to value of your property, how much you want to borrow, what you plan to do with the loan, what type of property you have and where it is located, your age, credit report history, credit score, and income.
If you want to get a cheap, low-rate loan, it all comes down to equity. The more equity you have, the cheaper your second charge loan is likely to be. This is because having more equity makes you a lower risk to lenders, and they, in turn, reward you with lower interest rates.
Equally important to holding equity is having access to the entire market to find the best deals, and this is where the experts we work with can help. When you approach a lender directly, you only have access to their deals, so you could be losing out. The experts, on the other hand, are able to source deals that may not be available to the public.
You may also want to steer clear of online rates tables if you’re looking to see how much a second charge mortgage will cost you. This is because these tables are not tailored to your individual needs and circumstances.
If you want to borrow but you have no equity in your property, you might be able to get finance with a 'non-equity' loan, though you may not get the cheapest rates compared with a secured loan.
What's the maximum loan to value for a second charge mortgage?
Your maximum loan to value (LTV) for a second charge mortgage depends on your credit report and the amount of equity you have in your property.
With a traditional mortgage, your LTV ratio is calculated by the amount you're borrowing against the total value of the property. For example, a £300,000 property with a £30,000 deposit will require a £270,000 loan, which means that your loan to value ratio is 90%. This is classed as a high LTV mortgage.
However, a second charge mortgage is combined with the debt in your primary mortgage to calculate your maximum loan to value. So, if your existing mortgage plus the amount you wish to borrow on a second charge mortgage totals £200,000 and the value of your property is £300,000, then the LTV will be 67%.
The smaller the figure, the better rate you may be able to get.
Speak with a mortgage expert to calculate what your loan to value ratio could be, or if you have any other questions regarding second charge mortgages.
Speak to an expert about your second charge mortgage affordability
If you're interested in a second charge mortgage and want to find out more about the affordability aspects, the mortgage brokers we work with will be able to help you.
Give us a call on 0808 189 2301 or make an enquiry here, and we'll put you in touch with the experts for a free, no-obligation chat.
*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...