What is a second charge mortgage and is it worth it?

What is a second charge mortgage?

A second charge mortgage is an additional loan that’s secured against your property, without making any changes to the mortgage that’s already in place. It is also known as a ‘secured loan’ or a ‘second mortgage’.

How do second charge mortgages work?

A second charge mortgage lets you take out a second mortgage against your property and use the money to fund home renovations, repairs or other large expenses. Unlike remortgaging, your existing mortgage will stay in place and you’ll pay both mortgages at the same time. 

When you take out a second charge mortgage, the capital (or equity) in your home will be used as collateral. This means that while you’ll still own your home, it’ll be used as a security by the lender until the loan is paid back. As with any type of mortgage secured against your property, if you were to stop making your repayments, your home could be repossessed.

Are second charge mortgages expensive?

Second mortgages tend to have a higher interest rate than first mortgages, so they can be more expensive overall. It is possible that you could get a lower interest rate by remortgaging instead or by taking out a further advance with your current lender.

If you were unable to keep up with your mortgage payments and your home was repossessed, your first mortgage lender would be paid before the second mortgage lender. This is why second charge lenders tend to set higher interest rates, as this type of lending is considered a higher risk.

Why would you get a second charge mortgage?

Homeowners sometimes use second charge mortgages as an alternative to remortgaging. By taking out a second charge mortgage secured against your house, you can raise money for home improvements or other large expenses — without making any changes to your existing home loan.

A second charge mortgage can also be an alternative to a personal loan. If you’re finding it hard to get a personal loan because you’re self-employed, for example, a second charge mortgage may be more suitable.

If your current mortgage has a high early repayment charge (ERC), using a second charge mortgage to release equity may be cheaper than remortgaging early. 

What other users are there for a second charge mortgage?

Another reason you might use a second charge mortgage is to bolster your house deposit through an Equity Loan. If you want to get on the property ladder, but are struggling to save up enough for a deposit, you can boost your house fund through a private equity loan. 

With a larger house deposit, you can get access to lower interest rates which will make your monthly repayments more affordable. Or you could use your enhanced deposit to afford a larger property.

This is taken out as a second charge mortgage secured against your new home. In return for providing you with the extra cash you need, your lender will have a stake in your property. This means they will share in any future profit or loss made on the home. 

Each lender has their own eligibility requirements and rules on how the equity loan is paid back. There are interest-only options which keep monthly payments lower, but will give the lender a larger stake in your home. If you choose to pay back the interest and the loan together, your monthly payments will be higher but your lender will have a smaller share of your property. 

Should I remortgage or get a second charge mortgage? 

A second charge mortgage may be the better option if your current mortgage has a high early repayment charge that would cost you more than a second mortgage would in interest.

If you’re struggling to access the type of new mortgage deal that you want, perhaps due to self-employment, or your credit rating has declined since you took out your first mortgage, a second charge mortgage may be better than remortgaging. This is because you may struggle to get an affordable interest rate if you were to remortgage.

However, depending on what mortgage interest rates are currently available, it could be cheaper to remortgage onto a new deal rather than go for a second charge mortgage.This is because a second mortgage will often cost you more in interest than paything the early repayment charges for your first mortgage. 

Before taking out a second charge mortgage, you need to look closely at the terms of your current mortgage, the cost of a second mortgage, and whether you’d be better off financially if you remortgaged or took out an additional loan instead. 

This is why it’s so important to get specialist mortgage advice tailored to your personal circumstances before making a decision, as which option is right for you depends on your affordability, as well as what the market is doing.

By speaking to a mortgage advisor when considering your options, they’ll be able to walk you through the different scenarios to find the best solution for you.

Learn more: How to remortgage your house

What are the risks of a second charge mortgage?

Now you know how second mortgages work, let’s look at the risks in a little more detail. 

Here’s what you need to know:

• You’ll usually pay a higher interest rate on a second charge mortgage than on your first mortgage
• Your second mortgage could cost you more than if you were to get a personal loan or pay the early repayment charge for exiting your first mortgage deal early
• You could lose your home if you fall behind on the repayments. If you’re already struggling financially, please avoid this type of credit and speak to a debt advisor
• If you’re struggling for money or there’s a chance your circumstances may change in the next few years, taking out an additional loan can be risky. If you cannot make the repayments, your home could be repossessed.

Can you lose your house with a second mortgage?

Yes, if you get into financial difficulties and you’re unable to keep up with your mortgage payments, you could lose your home. This is why it’s essential that you can comfortably afford a second mortgage alongside your existing mortgage and any other financial responsibilities. 

Read more: How much house can I afford?

You’ll also need to consider how affordable your repayments will be if your circumstances change. If you or your partner lost your job, would you be able to keep on top of your expenses? What if interest rates were to rise? Ensuring you can afford a second mortgage in these situations allows you to be prepared in case money becomes stretched.

Can a lender refuse a second charge mortgage?

Yes, a lender can refuse a second charge mortgage. To take out a second mortgage, you’ll need to get permission from your existing lender first. You will also need to pass the affordability checks for the second charge mortgage, too.

Can I get a second charge mortgage and how much can I borrow?

Whether or not you can get a second charge mortgage will depend on your income, the amount of equity you have in your property and your financial situation as a whole. 

Some lenders will cap the maximum second charge mortgage amount at 75% or 80% of the equity amount. 

If you have a high income, you may be able to find a second mortgage lender who’ll match the amount of equity you have in your home. So if you have £100,000 of equity in your property, you may be able to borrow £100,000 with a second charge mortgage.

Lenders must comply with a series of rules set by the Financial Conduct Authority (FCA) and each lender will have their own set of affordability criteria which they’ll use to assess potential borrowers’ affordability. Not only will lenders want to see that you can afford your payments now, they’ll also carry out ‘stress tests’ to assess how your mortgage affordability could change in future.