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Sometimes, you might want to borrow a large chunk of money for something that’s tricky to pay for upfront, such as home improvements.
Second charge mortgages come into their own 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.
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.
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:
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 are likely to 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.
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.
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 their being unsecured means that if you don’t make your repayments, your home isn’t at risk. Personal loan terms are usually shorter than mortgage terms, so you would be repaying your borrowings typically over 2-7 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 per cent, however this can work out less expensive over the term than a second charge loan.
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.
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.
Here are some of the big players in second charge mortgages, with some basic details of the loans they offer.
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