How second charge loans can help interest-only borrowers
There are almost three million mortgage borrowers in the UK with interest-only deals, paying back just the interest on their loans every month but none of the capital.
As many mortgage lenders have tightened up their criteria in recent years, and either no longer offer interest-only mortgages or provide them on a limited basis up to 50% loan to value, many such borrowers are unable to remortgage away from their current lenders onto another interest-only deal. Most banks and building societies would insist on converting their loan to a ‘repayment’ type arrangement, whereby they have to repay the interest and an element of the capital owed each month. This inevitably means an increase in repayments, which the borrower may not be comfortable with.
Some lenders also refuse to allow an interest-only borrower to remortgage unless they can prove how they plan to pay off the capital outstanding on their loan at the end of the mortgage term, which some borrowers are not able to do at a relatively early point in the life of their mortgage.
If you are such a borrower and are looking to raise extra finance for some reason, be it home improvements, debt consolidation or for a deposit on a buy-to-let property, a second charge mortgage could be the answer.
A second charge mortgage works like a first charge or main mortgage and is secured against your home, but as the name suggests it comes second in line to a ‘first charge’ mortgage in the unlikely event that you default on your payments and have your home repossessed.
As such a second charge loan is a higher risk for a lender and comes with a higher interest rate attached than a first mortgage – but second charges are usually considerably cheaper than unsecured personal loans. In fact, in the last 12 months second charge mortgage rates have fallen to all-time lows and can be found priced at less than 5% in some instances.
Second charge loans can generally be taken out for anything from five to 25 years.