Second charge mortgages are loans secured against your home. For UK homeowners, they’re an alternative to remortgaging or taking out a personal loan.
These loans are secured against UK residential properties. They are also known as second charge loans, having a second charge on a mortgage, mortgage second charges, second mortgages, secured loans or Homeowner Loans.
A lot of people don’t understand second charge mortgages. Many confuse them with high-interest financial products like payday loans – but nothing could be further from the truth.
Most of our customers have good incomes and above average credit scores. Here are some of the typical questions we get asked.
What can second charge mortgages be used for?
You can use a second charge mortgage for almost any legal purpose, depending on your individual circumstances. These can include:
- Financing larger home improvements like adding an extension
- Consolidating existing loans or credit card debts into one monthly payment
- Paying for a wedding and/or honeymoon
- Paying for a child’s school or university fees
- Funding for cosmetic surgery
- Paying a tax bill
- Business purposes including injecting cash into a company to buy machinery, stock or clear an overdraft may also be considered
It’s worth remembering that second charge mortgages will be listed on your credit history, and may be looked on unfavourably by other potential lenders. Think carefully before taking one out for a non-essential purpose, and talk to a broker if you’re unsure.
How do second charge mortgages work?
Second charge mortgages work by letting you borrow money using your property as security. They sit alongside your ‘regular’ first charge mortgage, so you’ll have two loans secured against your home.
Who can get a second charge mortgage?
If you’re a UK homeowner with a mortgage and equity in your property, you can apply for a second charge mortgage.
Since March 2016, the Financial Conduct Authority has regulated second charge mortgages. This means you have the same protection as a regular mortgage.
An adviser or broker must recommend a suitable product for your specific needs. And lenders must ensure affordable and responsible lending before approving an application.
To be eligible for a Homeowner Loan there are a few boxes you need to tick. You must own a property. It must have an outstanding mortgage, and have enough equity to borrow against.
Equity is the difference between the market value of your property and the balance left on your mortgage. The amount of equity you have will affect how much you can borrow, and the length of repayment you’re offered.
Lenders will also check your credit score to understand your financial history.
It’s important to consider all available options. Speak to a financial adviser or a mortgage broker who can provide guidance and help you find the right loan for you.
How can I take out a second charge mortgage?
Some lenders sell second charge mortgages direct to customers. For others including Pepper Money, you need to go through a broker. They can talk you through your options and give you their recommendation – whether that’s one of our loans, or somebody else’s.
When you apply, the lender will do several things. They’ll run a credit check on you, value your property and ask for proof of income.
What are the pros and cons of second charge mortgages?
The pros and cons depend on your circumstances. Situations where they may work for you include:
If you’re looking to borrow a significant amount
A second charge mortgage could be a good option if you’re looking to borrow more than £25,000. Secured lending like a second charge mortgage can allow you to borrow higher amounts and at lower interest rates than an unsecured loan. Remember, you’re borrowing against the equity in your property, and it’s also worth considering remortgaging.
When you’ve got a low rate on your current mortgage that you don’t want to lose
If you’ve already got a great interest rate on your current mortgage, then a second charge mortgage could be a good idea. This is because it’s separate from your existing mortgage. It’s especially true if remortgaging means moving to a higher rate.
If your current mortgage has a high early repayment charge or penalty fee
In this situation, it may be cheaper for you to take out a second charge mortgage. If you remortgage you would have to pay this fee.
When you’ve got an interest-only mortgage that you want to keep
If remortgaging would mean losing your interest-only deal, it’s worth considering a second charge mortgage.
If you can’t borrow more from your existing mortgage lender
A second charge mortgage may be an alternative option.
If your credit rating is lower than it was when you took out your current mortgage
If your credit rating has gone down, you may have to pay a higher interest rate if you remortgaged. This is true of both your existing balance and the additional amount you want to borrow.
If you take out a second charge mortgage, you can keep your current mortgage terms. You’d only pay a new rate for your extra borrowing.
When you need to have funds available quickly
A second charge mortgage may be a faster option to access funds than a traditional remortgage
If your income isn’t ‘standard’
The job market has changed drastically, and high street lenders have been slow to react. If you’re self-employed and only have an accountant’s reference as your proof of income, it can be difficult to borrow.
This can also happen if you’ve got several unusual income sources, instead of one source of income. If this is the case, you may find a second charge mortgage useful.
What are the downsides of second charge mortgages?
When taking out a second charge mortgage, you need to consider that:
The loan is secured against your property
This means your home could be at risk if you default on repayments. This may not affect most borrowers, but it’s certainly something to bear in mind. It’s important to understand what would happen if your circumstances change, such as losing your job.
You may end up paying more in total interest
Secured loan rates are often lower than unsecured loan rates – but they’re often paid off over a longer period. Even if your monthly payments are less, you may end up paying more interest over the lifetime of the second charge mortgage.
Another product may be more suitable, especially for amounts less than £25,000.
We recommend that you seek advice on whether a second charge mortgage is the best option for you. Depending on your circumstances, another product like an unsecured loan or remortgaging may be better.
How much can you borrow on a second charge mortgage?
Second charge mortgages can be anywhere between £5,000 and £2,500,000. The amount you can borrow depends on the equity in your property. Equity is the difference between the market value of your property and the balance left on your mortgage.
What does second charge mortgage loan to value mean?
You can generally borrow up to a maximum percentage of your property’s value – less your existing mortgage. This is known as the Loan to Value (LTV).
Let’s say your home is valued at £500,000, you’ve got £200,000 left on your mortgage and a lender offers you a 95% LTV. In this case you could borrow up to £275,000 – 95% of £300,000 is £275,000.
Repayment terms are typically between 3 to 30 years – depending on your circumstances. As second charge mortgages are often paid off over a longer term, monthly payments can be lower than other borrowing alternatives.
Can second charge mortgages be used to fund a deposit for a buy to let property?
Yes. Providing you’re eligible, they can be used to either totally or partially fund a deposit on a buy to let property.
Second charge or re-mortgage?
The choice to take out a second charge mortgage or remortgage to release additional funds depends on your circumstances. The big difference is that a second charge mortgage allows you to keep your existing mortgage in place.
This means you’ll have two mortgages on your property. It can be worth doing this if you already have good terms on your existing mortgage, like a low interest rate.
Remortgaging means replacing your existing mortgage with a new one – so you’ll still only have one mortgage. However, the whole amount will be subject to new terms and conditions, including a new interest rate.