What is a second charge mortgage?
Second charge mortgages – also known as Homeowner Loans – are loans secured on property that has already been mortgaged. Second charge loans are not the same as regular mortgages, in that they have different terms
How second charge mortgages work
You can borrow a sum of money by using the equity in your house as security. This means that your home is potentially at risk if you are unable to repay the loan.
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.
Pros of second charge mortgages
Second charge mortgages or Homeowner Loans have three main benefits:
Avoid the drawbacks of other borrowing alternatives
You won’t be restricted by the limited criteria of a Further Advance on your current mortgage. You won’t need to tell your provider about changes to your circumstances. And you won’t have to face the embarrassment of a straight ‘no’ from them, either.
No impact on your current mortgage
If you have an extended period on your current mortgage terms, it may be in your best interests to leave it undisturbed.
You’ll be able to keep your existing mortgage rate and avoid the early repayment charge of remortgaging. If you were to remortgage, you may not be able to get terms that are as favourable as the ones you have now.
Lower interest rates than for unsecured loans
Second charge mortgage rates tend to be lower than those on unsecured personal loans. You may also find it easier to get a second charge mortgage than an unsecured personal loan.
Cons of second charge mortgages
Homeowner Loans or second charge mortgages have three main drawbacks:
They can be more challenging to obtain
Both regular mortgages and regular unsecured loans are in higher demand than second charge mortgages. This means that more lenders provide them, resulting in more competition between lenders.
By contrast, in the second charge mortgage market, the level of competition is much lower. So it’s more difficult to shop around.
They can be more expensive
Setting up a second charge mortgage tends to come with fees similar to a regular mortgage. These would usually include arrangement fees, valuation fees and legal fees. Second charge mortgages also typically charge higher interest rates than regular mortgages.
Second charge mortgages will be listed on your credit history, and you need to let your current mortgage lender know. They may be looked on unfavourably by other potential lenders. This may increase the cost of other borrowing.
They are directly secured against your home
Second charge mortgages give lenders a direct route to making a claim on a property. It’s important you always pay on time with a second charge mortgage, as your home could be at risk if you don’t.
Second charge mortgages and estate planning
Second charge mortgages leave you with full ownership of your property. This can be a drawback as well as a benefit.
For example, if you want to reduce the value of your estate, it may be in your best interests to sell a stake in your home – this can be done using equity release.
Is a second charge mortgage right for you?
The starting point for deciding if a second charge mortgage or Homeowner Loan is right for you is how you intend to use the money. Specifically, is it mainly for debt consolidation or for another purpose?
Second charge mortgages and debt consolidation
If you’re thinking of using a second charge mortgage to manage debts, then it’s best to seek independent, professional financial advice. They can help calculate what reductions you could make to your monthly budget and whether you’re paying the debt back over a more extended period, which could mean you pay more over the entire loan length.
If you’re struggling with debts, you may wish to speak with a debt counsellor, who will be able to go through all the different options with you. They will help you to pick the best one for you and your situation.
Second charge mortgages for other purposes
If you’re considering using a second charge mortgage for a different reason, you should decide if you can afford further borrowing.
If you’re sure you can, then your next step is to identify what other options are available to you. You can then compare the cost of a second charge mortgage against them.
When you do this, be sure to compare the total cost of the debt. This means the set-up costs and the interest over the life of the loan. Remember that loans with low interest rates could be more expensive than loans with higher interest rates if they are for a longer term.
More questions?
If you still want to know more, check out our frequently asked questions.
Top tips for applying for a second charge mortgage
Here are three things to bear in mind before you apply:
- Check your credit scores. Look for mistakes, missing information, and out-of-date details. If you spot any issues, deal with them before you apply.
- Get all your documentation together. This will avoid delays in processing.
- Get professional advice. Second charge mortgages are not to be entered into lightly. It’s important that you speak with a qualified financial or mortgage adviser who can help you decide if a second charge mortgage is the right product for you. Once you’re ready to apply, get in touch with one of our trusted broker partners. They will help you apply for a Homeowner Loan that suits you perfectly.