When a homeowner is looking to borrow a substantial amount, for example, to make home improvements or consolidate debt, brokers will often compare the customer’s option to take out a second charge mortgage or remortgage. In this article, we explain what both mean, their pros and cons, plus situations where each may be the better option.
What does each mean?
Taking out a second charge mortgage means the customers current first charge mortgage stays in place, at its current terms. The customer will use the equity in their property to borrow the additional funds they need. While remortgaging means their existing mortgage will be replaced with a new one, including different terms and conditions, for the sum of the current mortgage plus the extra amount they are looking to borrow. Every case is different, but which option is most suitable will often depend on the situation with the customers first charge mortgage.
Why should a customer remortgage?
There are several reasons why remortgaging may be suitable for your customer:
- By Remortgaging they can get a better interest rate, e.g. an introductory offer, or a better rate based on a lower LTV because the value of their home has increased.
- They may be able to access a deal that allows them to make overpayments. This will give them the flexibility to pay off their mortgage more quickly and potentially reduce the total amount of interest that they pay over the lifetime of the mortgage.
- The ease of having one monthly mortgage payment.
Other customer considerations to remortgaging
There are a couple of things that need to be accounted for when a customer is considering remortgaging. Firstly, will they incur any penalty charges, such as an early redemption charge (ERC), if they settle their current mortgage early? Also, if they’re happy with their current deal, for example, they have a particularly low-interest rate, they may be better retaining this and consider looking at a second charge mortgage instead.
Circumstances where a second charge mortgage could be suitable
There are a variety of circumstances where a second charge mortgage may be a good choice for a customer. These are often linked to situations where their credit history has worsened, or they have had some form of adverse credit since their last mortgage. Examples include:
- They have competitive high street mortgage terms currently, but recent adverse credit means their rate is likely to be higher if they change mortgage now.
- Flexible income sources need to be considered for the new loan
- They currently have an interest-only mortgage and keeping their monthly mortgage cost low is of primary concern.
- They’ve had recent credit repayment incidents, such as defaults or late payments, and the speed of raising capital is critical.
Other customer considerations before taking out a second charge mortgage
There are a couple of things to consider when a customer is looking at taking out a second charge mortgage. Firstly, the interest rate may be higher than the rate they’d get from a remortgage. Billing is also slightly more complicated as the customer will now need to make two monthly mortgage payments rather than one.