Guide to second charge mortgages
What is a second charge mortgage?
A second charge mortgage is a loan borrowed against your home, on top of your existing mortgage. A mortgage is the ‘first charge’ against your home. As the loan is secured against your property, you need to have sufficient equity in your home to support the loan.
If you were ever to default on your repayments and have your home repossessed and sold, the ‘first charge’ mortgage lender would get their money back first, and the ‘second charge’ lender would be paid back after the mortgage and potentially other secured loans have been repaid. As the second lender is taking a higher risk, second charge loans are charged at higher interest rates than mortgages (first charge loans). But they are cheaper than unsecured personal loans. So it is obvious why you might choose a second charge over a personal bank loan. But why would you consider a second charge loan, rather than simply remortgaging and borrowing more on your first charge loan?
Second charge loan v remortgage
Here are some examples of cases where a second charge loan might make more sense than a remortgage:
1.You are paying a very low mortgage rate.
Thousands of mortgage borrowers in the UK are on very low lifetime tracker mortgages taken out pre-2008, paying less than 2%. If you are on one of these deals and you want to borrow, say £50,000 extra, your mortgage lender may offer you the extra cash but insist that you remortgage the whole deal onto a higher interest rate.
In this instance, it may well make sense to keep your existing borrowing at the lower rate guaranteed for the life of your mortgage, and just borrow the extra £50,000 as a second charge at a higher rate.
2. You are locked into a fixed rate mortgage
The vast majority of mortgages taken out in the last five years have been fixed rate deals. Fixed rates generally come with Early Repayment Charges (ERCs), which kick in if you leave your deal or remortgage before the end of your agreed term.
If you want to borrow the extra £50,000 in our example and your lender is not prepared to lend it to you, another lender might be willing. However, if ERCs apply to your fixed rate, your existing lender could charge you thousands of pounds to leave. So rather than remortgaging to a new lender, it could make more sense to simply opt for a second charge loan at a higher rate of interest, and leave the bulk of your borrowing on the fixed rate.
3. You need to borrow money for a business venture
Most mainstream mortgage lenders won’t allow you to borrow money secured against your home for particular reasons. If you want to use the funds to carry out home improvements, cover school fees or pay for IVF, fine. If you want to invest in a business, you may well find that your lender won’t advance the necessary funds via a remortgage.
A second charge lender may take a more flexible view.
4. You need a quick turnaround.
It can take a number of weeks to organise a remortgage. If you require extra finance in a hurry, going for a second charge might be the quickest option available to you.