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What is a second charge Mortgage?
Second charge mortgages offers an alternative way to release equity from your property.
They are a secured loan, they use the borrower’s home as security for the loan.
How do they work ?
There are three ways for applicants to borrow from their property.
1: Further advance
These two options are known as first charge.
Why would you use a second charge mortgage instead of the first options such as a further advance and remortgaging.
Second charges are valuable when the further advance or the remortgage is either unavailable or restricted to you personal circumstance.
Examples of this are when the borrower’s circumstances does not prohibit a first charge due to the lender tightening lending criteria since they got there first mortgage. Or it could be because they need the money more quickly and find that a second charge mortgage is the quickest option available to you.
If your credit has been impaired since you first got your mortgage it may end up being more expensive to get a first charge mortgage. As remortgaging may mean you end up paying more on your overall mortgage then you would do if you had just taken out a second charge.
Alternatively the nature of your existing first charge may prevent change as if the borrower is already on an interest only mortgage they may not be able to afford to change to a repayment mortgage. If the borrower decides to go for a second charge mortgage it leaves the first charge unaffected and may be the cheaper option.
A less obvious but almost more critical time to consider a second charge mortgage is when the client is on a good first charge deal today.
An example of this is:
Tom and Meg have a £380,000 five year fixed rate mortgage with three years to run until the fixed rate deal ends.
They have decided to buy a new car and want to borrow 40,000.
They now have two options they can either remortgage or get a second charge mortgage.
If they remortgage, they’ll have to pay the £10,000 penalty and there’s no guarantee that they’ll be able to get a better interest rate than the one they are currently paying – in fact they might have to pay more.
If they take out a second charge mortgage, they will pay a higher interest rate on the £40,000 than they pay on their first mortgage, plus fees for arranging the second charge mortgage. However, this will be far less than paying the £10,000 early repayment charge and possibly a higher interest rate on their first mortgage.
Tom and Meg decide to take out a secured loan that doesn’t have any early repayment penalties beyond three years (when their main mortgage deal ends).
Please be aware a second charge mortgage works in the same way as your first charge mortgage and your home will be at risk if you do not keep up payments.