A second charge mortgage is a type of loan secured against your property. It can help you get the funds you need for things like home improvements or debt consolidation. This can be a great way to use some of the equity you have built in your property by using your home as collateral.
You should consider various things carefully before applying for a second charge mortgage, so keep reading to find out if this could be the right choice for you.
How do second charge mortgages work?
Second charge mortgages work similarly to other secured loans. This means that you use an asset you own as security or collateral against the loan. If you fail to make your loan repayments, the lender will have the right to repossess the asset you have put as collateral – in this case, your home.
Since you offer collateral, you’ll find that interest rates are lower than with standard personal loans. Because one of the factors that determines the maximum loan size is the value of the property minus what you owe on the mortgage, you can often borrow more money than an unsecured or personal loan. Most borrowers arrange a Second Charge mortgage through a broker, the broker will assess your circumstances and provide you with advice. They will also search the whole market to find you the best deal, and because a lot of Second Charge mortgages are arranged via Specialist Lenders such as Pepper Money, you might not have access to them without a broker. Once you have been accepted and the money has been paid, you’ll have two separate mortgage loans and will have to make monthly payments for both of them.
How much can I borrow for a second charge mortgage?
The amount you can borrow will usually be based on the equity you have in your property. This is the amount your home is worth, minus how much you have left to repay on your first mortgage. So, if your property is worth £400,000 and you still owe £250,000, you could be able to borrow up to £150,000 on a second charge mortgage.
However, the amount you can borrow will also depend on various factors such as your income, outgoings, credit score, and the loan-to-value ratio that the lender has set.
Why should you take out a second charge mortgage?
Taking out a second mortgage can be a great way to access funds, especially if you’re struggling to get approved for an unsecured personal loan or the amounts being offered are not sufficient for your needs. Getting a secured loan can be easier if you:
- Are self-employed
- Have a poor credit history
- Have a high debt-to-income ratio
- Need a higher loan amount than you would otherwise get approved for
Some borrowers think the best way to release the equity in their property is by remortgaging their existing first mortgage, taking the opportunity to release some of the equity as additional funds, however, this could mean losing a preferable rate on the first mortgage or having to pay an early repayment charge.
Considerations before taking out a second charge mortgage
Before you look at applying for a secured loan or second mortgage, you should check the pros and cons and take advice from a professional to make sure that it is the best choice for your financial situation.
If you think you’re ready to apply, check out our tips for applying for a second charge mortgage.
Collateral and the risk to your home
Using your home as collateral helps you get more favourable terms for the loan. However, if you fail to meet your repayments, the lender could take your property. You should carefully weigh up whether or not you can make payments on both your main mortgage and your second charge mortgage. A mortgage broker and the lender will work closely with you to calculate what you can borrow to ensure the loan is affordable.
Limits on how you use the money
Different lenders have different terms for how you can use the funds from a second charge mortgage, and whilst a second charge can be used for almost any legal purpose, you should check that your intended use is allowed by a lender before applying. A broker will be able to help you work out which product is right for your circumstances.
Debt to income ratio
You should always keep an eye on your debt to income ratio. This is how much you spend on debt and bills each month compared to your income. Working this out is a good way to make sure that you can afford to repay a new loan while still saving for emergencies.
What happens if I move house?
If you move house while you have a second charge mortgage, you will probably have to pay this back before you can purchase a new property. Some lenders may allow you to port or transfer the loan to the new property, but this isn’t always the case and is something to check when you’re applying.
If you have to pay off the second charge mortgage, you should think about what impact that has on your deposit to buy the next property, Reducing your deposit means you may have to borrow more money which in turn could cost you more each month to repay.
Alternatives to second charge mortgages
If you’re unsure whether a second charge mortgage is the right choice for you, there are other options to consider as well.
Remortgaging
Remortgaging for more than you owe on the property can help you access more funds for home improvements. This leaves you with only one mortgage to pay off each month, though it can increase how long you will be paying it for. If your credit rating has improved since you first took out your mortgage, you might get a better deal on interest rates when you remortgage. However, you should be aware of any early repayment charges that can make this a more expensive option.
Personal loans
Unsecured personal loans can be approved for a wide range of uses, including holidays, weddings, home improvements, or vehicle purchases. While you might not be able to borrow as much as with a second charge mortgage, if you have a good credit history the interest rates might be comparable.
Saving up
You can also look at the best ways to save money and pay for home improvements out of your savings accounts. This has the benefit of stopping you from going into more debt, but it means you have to wait longer before you have the funds.