Understanding a Second Charge on Mortgage Lending vs an Equity Loan
Equity loans may sound similar to a second charge mortgage UK, but there are differences. Equity loans can be set up as lifetime mortgages, for example, where the owner does not make repayments – instead, the lender sells the property when they pass away or move into care to repay the loan plus interest.
However, the basic principle of second charge residential mortgage borrowing is comparable and effectively means you can borrow mortgage lending against your property without needing to remortgage your existing product.
Remortgaging can incur high costs if you are within a fixed term and would need to pay early settlement fees. Other homeowners do not wish to remortgage because they would lose a beneficial interest rate by doing so.
Applying for a Second Charge Residential Mortgage to Improve a Property
Second charge mortgage companies are familiar with applications to raise financing against the property equity to cover the cost of improvements. You can use a second charge residential mortgage to pay for redecorations or refurbishments, to build an extension, fit a new bathroom or kitchen or cover any other outgoings associated with enhancing the appearance or functionality of your home.
Homeowners may also apply for a second charge mortgage UK product to cover the costs of more in-depth restorations, such as knowing down internal walls to create an open plan living space, building a conservatory or converting the attic.
Second charge mortgage lenders UK will permit the borrower to use the funds largely as they wish but may need to have some indication of what the funds are used for.
Using Second Charge Mortgage UK Borrowing to Consolidate Debts
Another common scenario is where a homeowner has plenty of equity in their property but has other debts with much higher interest rates than they would expect to pay on a second charge residential mortgage.
Most lenders are comfortable approving a second charge mortgage UK to consolidate debts. However, it is important to understand that even with a lower interest rate and longer term, you could potentially pay back more.
Homeowners also use second charge residential mortgage products to cover other costs, such as raising the deposit to buy another property that is not eligible for a mortgage in its current state or to buy a buy-to-let rental property.
The downside is that any second charge mortgage companies will secure the loan against the property, and you put the property at risk if you do not make repayments. While the second charge mortgage UK will be a second repayment priority to the first lender, it is still possible to lose your home if you do not keep up the agreed repayments.
Alternatives to Second Charge Mortgage Companies for Home Improvements
As an independent, whole-of-market broker, we act on behalf of our clients and can happily discuss alternatives to a second charge residential mortgage if you decide this isn’t the right product for you. Assuming you require a second charge on mortgage borrowing to cover the costs of improvement works, you may also wish to consider the following options.
Remortgaging vs Second Charge Mortgage UK
Refinancing your existing mortgage is an option if you can remortgage and it is financially viable to do so. There are two options – either remortgaging with the same lender or refinancing the loan through another mortgage provider.
The difference from a standard remortgage would be that instead of an additional product via a second charge residential mortgage, you increase the overall borrowing value when remortgaging.
Lenders will need to assess the property valuation and your existing equity ownership to decide whether to approve the application – and if you are in a fixed term and would incur early settlement fees, these should be included in your calculations.
Home Improvement Loans vs Second Charge Residential Mortgage
Another option could be to apply for a home improvement loan specifically designed for these projects. A personal loan will still have a fixed term and charge interest, but you can have either unsecured or secured borrowing, which differs from a second charge residential mortgage which is always secured.
Unsecured loans are often more expensive because the lender accepts a higher risk. Still, you can apply for a lower value, below the minimum borrowing normally available from second charge mortgage companies and repay the debt over a shorter period.
The right solutions very much depend on the amount you wish to borrow, your equity and property value, and your existing mortgage product.
For further advice, please contact the Revolution Finance Brokers team at your convenience.
2023-05-09 
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