Best second charge mortgages

If you own your own home with a mortgage and have built up sufficient equity, then a second charge mortgage might be an alternative to remortgaging or a personal loan.

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Second charge mortgages are a popular choice when remortgaging would be too expensive and you need more money than the limit on a credit card or personal loan allows. Often, they are a way of benefiting now rather than in the future from any increase in the amount of equity you have in your property since you bought it.

This guide will take you through how they work, why you might consider one, the advantages and disadvantages, whether you are likely to be eligible for one and how to compare lenders.

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Representative Example: If you borrow £43,000 over 16 years at a rate of 10.25% variable, you will pay 192 instalments of £505.18 per month and a total amount payable of £96,994.56. This includes the net loan, interest of £49,404.56, a broker fee of £3,995 and a lender fee of £595. The overall cost for comparison is 12.7% APRC variable.
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What is a second charge mortgage?

A second charge mortgage is a loan secured against the equity in your property in addition to your existing mortgage.

“Secured” means that the lender has the right to repossess your home if you fail to keep up with repayments on the second charge loan – just like with your original mortgage. So they can be more risky than unsecured personal loans.

Second charge mortgages are commonly used for home improvement, but second charge lenders will consider other purposes too.

Why would I take out a second charge mortgage?

Interest rates on second charge loans are typically higher than regular mortgage rates, but despite these higher rates, second charge mortgages can sometimes work out cheaper overall than remortgaging.

Remortgaging is the most common way of benefiting from a rise in the value of your home. If the value of your property or the amount you earn has risen, you may be able to increase the amount of your existing mortgage without having to pay a higher interest rate. This is known as a “further advance”. A second charge mortgage is only preferable to a further advance in a few circumstances. Here are some examples:

  • If your credit score isn’t great, a second charge loan might be a better option, as lenders are looking at the amount of equity you have rather than your credit history when determining whether to lend. However, second charge lenders, like regular mortgage lenders, offer better rates to applicants with good credit histories.
  • A second charge mortgage can also be appropriate if your existing mortgage has high early repayment charges, making remortgaging prohibitively expensive.
  • If you are applying for a further advance with your existing lender, the amount you wish to borrow on top of your existing mortgage can push you into the lender’s next LTV bracket, meaning you might have to pay a slightly higher interest rate on all of your borrowings.
  • Alternatively, you might just have a great rate on your existing loan, so you don’t want to remortgage because that would mean having to pay a higher rate on all of your borrowings, rather than just the additional loan.

The lower monthly repayments that come with a longer term can make second charge mortgages attractive. The repayment term can be as long as the term left on your existing mortgage – in some cases, up to 40 years if that is how long you have left on your current loan.

However, the longer term means that you will be paying more interest overall. For this reason, they are not usually recommended for consolidating existing debts. You will likely pay less over time if you take out other lower rate credit cards or personal loans to repay existing debts, although with these shorter term options, your monthly repayments are likely to be higher.

How do second charge mortgages work?

Second charge mortgages work best when you have a lot of equity in your property to borrow against. More equity makes you a lower risk, and lenders reward lower risk borrowers with lower interest rates.

If you want to apply for a second charge mortgage, it’s a good idea to contact your existing lender first for a further advance. If this isn’t going to work, or if you suspect that a second charge mortgage might work out cheaper, you can approach a specialist lender for a second charge loan.

The process is similar to applying for a regular mortgage, with an application process that can take around four weeks. The lender will carry out an affordability assessment before agreeing to lend against the equity in your property. As well as credit checks, it is likely that this will involve a visit from a surveyor to value your home.

While the amount of equity and your ability to meet repayments are important, the application process is less detailed than a primary mortgage, as the security is your property value, rather than your credit history. If the property valuation is lower than expected, you may be told you can borrow less or have to pay a higher interest rate. The interest rate you will be offered will be based on the “loan to value” (LTV) ratio, including your existing mortgage, and the lower the LTV ratio, the lower the interest rate.

Are there alternatives?

You may wish to start by considering remortgaging as an alternative. Regardless of any additional borrowing, it’s generally a smart rule of thumb to review your mortgage every few years to make sure you’re getting a competitive rate.

Fixed-rate, unsecured personal loans, are typically available for amounts up to £25,000 (or in a few cases £50,000) and since they are unsecured, your home isn’t at risk if you don’t make your repayments. Personal loan terms are usually shorter than mortgage terms, so you would be repaying your borrowings typically over two to seven years, and because there’s less security for the lender, the rates can be higher. Personal loan providers also conduct credit checks and look at any existing borrowings you have before deciding whether to lend to you and at what rate. Your loan rate will depend largely on your credit score.

For smaller loan sizes of a few thousand pounds, credit cards can be worth considering. There may be a money transfer fee of up to 4%; however, this can work out less expensive over the long term than a second charge loan.

Am I eligible?

Eligibility will depend primarily on whether you have enough equity in your home. The amount of equity is the value of your property minus any existing mortgage. If this covers the amount you wish to borrow and is still affordable to you, you are likely to be eligible.

Lenders will want to know about your income and outgoings, just like with a regular mortgage application. You might be refused if the gap between your income and your outgoings is not enough to accommodate your second charge mortgage repayments. If you are self-employed, evidence of income, such as the last two years of company accounts or tax returns, will be required.

How can I compare my options?

Once you have a clear idea of how much you want to borrow, and how much you can afford to pay each month, you can start comparing costs from multiple lenders. Lenders each have clear minimum and maximum loan amounts and loan terms that they offer.

As well as looking at the interest rate and any charges that apply, such as early repayment charges, you’ll want to pay close attention to the monthly repayment figure and the total amount you would have to pay back. Spreading repayment over a longer period can bring down your monthly instalments to more manageable levels, but will push up the total overall cost of the loan.

Loans from some of the big players in second charge mortgages, with some basic details of the loans they offer, are compared in our table.

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Frequently asked questions about second charge mortgages

We show offers we can track - that's not every product on the market...yet. Unless we've said otherwise, products are in no particular order. The terms "best", "top", "cheap" (and variations of these) aren't ratings, though we always explain what's great about a product when we highlight it. This is subject to our terms of use. When you make major financial decisions, consider getting independent financial advice. Always consider your own circumstances when you compare products so you get what's right for you. Most of the data in Finder's comparison tables has the source: Moneyfacts Group PLC. In other cases, Finder has sourced data directly from providers.

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