This loan is taken out or secured against your current property without impacting your first-charge mortgage. The value of your property and how much equity you have will determine how much you can borrow. If you take out a second charge mortgage, you will have to pay back both your first charge and your second charge as per the terms of the loan.
Understanding Second Charge Mortgages
If you’re wondering, “What’s a second charge mortgage?” you’re in the right place. Imagine you already have a mortgage on your home, but you need to borrow more money. A second charge mortgage lets you do just that. It’s like a second loan that uses your home as security, but your first mortgage stays the same and isn’t affected.
This guide is going to help you understand all about second charge mortgages. You’ll learn:
What they are.
The costings.
And much more.
By the time you’re done reading, you’ll know if a second charge mortgage is a good option for you.
What is a Second Charge Mortgage?
Also known as a second mortgage or a secured loan, a second charge mortgage is a loan you secure against the equity in your home, on top of your existing mortgage. People often choose a second charge mortgage if they need available funds or can’t get another type of loan. This can be a good way to get money for making your home better, combining debts, and more.
Your home is used as security for this second loan, just like it is for your first mortgage. This means if you can’t pay back the loan, there’s a risk you could lose your house. So, it’s important to make sure you can afford to pay this extra loan before you decide to get it.
The main difference between your first and second mortgage is which loan gets paid off first if you sell your house. The first mortgage is always paid first, and anything left goes to pay off the second mortgage.
Securing a Second Charge Mortgage
Securing a second charge mortgage means following a few steps.
- First, you need to look around and compare second charge mortgage lenders to get the best deal.
- Then fill in an application form. Give info about your house, your first mortgage, and your personal finances.
- The lender will check your credit, see how much your house is worth, and decide if they think you can pay back the loan. If approved, they’ll give you an offer outlining the loan’s terms and conditions.
To be able to get a second charge mortgage, different lenders might look for different things. Usually they check:
- Your credit history.
- How much money you make.
- How much of your house you actually own (this is called equity).
They want to make sure you can pay the loan back and that it’s not too risky for them. Making sure you fit these requirements helps your chances of getting the loan.
What can make it harder or easier to get the loan? Things like how good your credit score is, if your income is steady, and how much your house is worth. Lenders also look at how much of your house’s value you want to borrow compared to how much you own. The more of your house you own, the better your chances are. If you owe money on other things, that could also affect their decision.
Costs Associated with Second Charge Mortgages
Understanding the costs that come with second charge mortgages is really important. Here are some main things you should think about:
Interest rates: The interest rates for second charge mortgages can change based on factors:
- Your credit score.
- How much of your property’s value you’re borrowing against.
- What the lender decides.
It’s a good idea to compare different lenders and their rates.
Total cost: Besides the interest rate, you should also think about the overall cost of a second charge mortgage. This includes:
- Setup fees.
- The cost of assessing your property’s value.
- Legal fees.
Knowing all these costs will help you see if you can afford the mortgage.
- Additional charges and fees: Sometimes, there might be other costs like: Fees for paying off the mortgage early.
- Leaving fees.
- Fees for changing to a different mortgage option.
It’s important to read the mortgage’s terms and conditions carefully to understand all the possible extra costs.
Pros and Cons of Second Charge Mortgages
Second charge mortgages can be a useful tool, but they also come with potential risks.
Pros:
- A second charge mortgage lets you borrow more money without changing your first mortgage. This is great if your first mortgage has a low interest rate or good terms that you don’t want to lose by getting a new mortgage.
- Second charge mortgages can also give you more money than other ways of borrowing. This is useful for big projects like fixing up your house or paying off lots of debts at once.
Cons:
- Second charge mortgages often have higher interest rates than first charge mortgages. This is because they’re seen as riskier by lenders. Also, setting up a second charge mortgage can cost more than other ways of borrowing money.
- Getting a second mortgage could be smart in some cases. For example, if you already have a low mortgage rate and don’t want to change it, or if it’s hard for you to get a regular loan because of your credit history. However, it’s really important to think about if you can afford it and what it means for your future.
Utilising a Second Charge Mortgage
Second charge mortgages can be really useful in several situations. Here’s how people often use them:
Home Improvement: A lot of people get second charge mortgages to help pay for big changes they want to make to their homes, like renovations. This way, they can turn their house into their dream home.
Debt Consolidation: If you have many debts that come with high interest, you can use a second charge mortgage to combine them all into one payment. This can save you money and make your finances easier to manage.
Property Investment: Some folks get a second charge mortgage to help buy more properties. This is helpful if you want to start or grow a collection of rental properties.
Second charge mortgages also have some other great benefits:
- They usually have lower interest rates than loans that don’t require security (like your home).
- They can give you a bigger amount of money.
- You can choose a repayment plan that fits your budget.
But remember, it’s really important to think about your own money situation and talk to a professional before you decide on a second charge mortgage.
Alternatives to Second Charge Mortgages
If you’re thinking about a second charge mortgage, there are other choices. One option is to remortgage, which means you add to your current mortgage to get more money. This could be good if you need a lot of money or want to put all your debts into one place. Remortgaging might also give you lower interest rates and a longer time to pay back the loan, which can make your monthly payments smaller.
You can also look at different ways to borrow money, like personal loans or credit cards, instead of a second mortgage. Personal loans usually have set interest rates and a clear plan for paying them back, but they might have higher interest rates compared to a mortgage.
Credit cards are easy for borrowing small amounts, but they often have high interest rates and you need to pay them back quicker.
When thinking about different ways to borrow money, it’s important to look at your money situation, what you need to borrow for, and your plans for the future. Talking to a mortgage advisor can really help you understand your options and make a smart choice.