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Second charge mortgages

When and how to take out a second charge mortgage

published: 31 July 2020
Read time: 5 minutes

If you’re a homeowner, you may be able to borrow more money via a second mortgage, also known as a second charge mortgage

Taking out a second charge mortgage allows you to use your home to borrow more money, for example to cover the cost of home improvements.

It can be a useful alternative to remortgaging to access additional borrowing – especially if you will face penalties to switch away from your current mortgage.

What is a second charge mortgage?

A second charge mortgage is a secured loan that uses the capital (or equity) in your home as collateral. In other words, it’s based on the difference between the value of the property and the amount you owe on your first mortgage.

A second mortgage is completely separate to your original mortgage, and can be a good way to access extra funds without remortgaging. However, it will mean you have two mortgages to pay off on the property.

If you become unable to pay either your first or your second mortgage, your home could be repossessed as a result.

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Why might I consider a second mortgage?

You might benefit from taking out a second mortgage if:

  • You’ll face big early repayment charges or penalties for switching away from your current mortgage deal

  • You're on a particularly good deal already, and remortgaging would mean paying a new higher interest rate across the whole borrowing amount

Can I get a second mortgage?

Only homeowners can take out second charge mortgages, but you don’t have to live in the property to apply. Second mortgages can also be taken out on second homes and buy-to-let flats and houses.  Either way, you’ll need some capital built up in the property to qualify.

You can work out how much capital you have by deducting the amount you owe on your first mortgage from the value of your home. Say your home is worth £300,000, and your existing mortgage is for £100,000, your capital is £200,000.

To take out a second charge mortgage, you’ll also need to get permission from your existing mortgage lender, and to prove to the second mortgage lender that you can afford the repayments on both loans.

How much can I borrow on a second charge mortgage?

The amount you can borrow on a second mortgage will depend on your income, and the amount of equity (or capital) you have in your property. If, for example, you have a high income and capital of £100,000, a second mortgage lender might agree to let you borrow the full £100,000 – although some will cap the maximum amount at 75% or 80% of the equity available.

The minimum amount you can borrow is usually £1,000.

How much does it cost to take out a second mortgage?

Second mortgage interest rates are generally higher, so you’ll probably have to pay more interest on your second mortgage than on your first.

The interest rates on second mortgages are usually higher because the first charge lender is paid before the second charge lender if your home is repossessed – meaning the second mortgage lender could lose out if the proceeds of the sale fail to clear both loans.

However, second mortgage rates may still be lower than on other forms of unsecured credit such as a personal loan.

What are the pros and cons of a second charge mortgage?

Before taking out a second mortgage, consider the pros and cons of taking one out.

What are the benefits of taking out a second-charge mortgage?

  • You can keep your existing mortgage deal – which could be particularly valuable if either interest rates have gone up or your credit rating has gone down

  • You don’t have to pay early repayment charges or penalties to remortgage now

  • You don’t have to extend the term of your current mortgage deal

  • Secured loans tend to be easier to access than unsecured personal loans, particularly if you’re self-employed

What are the drawbacks of taking out a second-charge mortgage?

  • You could lose your home if you fall behind on the repayments – making a second mortgage a bad idea if you’re struggling financially

  • You’ll have to pay off both mortgages in full if you move house, which could leave you with very little deposit

  • You’ll generally pay a higher interest rate than on your first mortgage, which is why many people choose to remortgage instead.

What are the alternatives to a second charge mortgage?

The main alternatives to taking out a second mortgage on your home or property are:

How can I take out a second charge mortgage?

A number of UK banks and building societies offer second charge mortgages. To qualify, you’ll have to demonstrate how much equity (or capital) you have in your property, and that you can afford to meet the repayments on both mortgages.

Your existing mortgage lender must also approve any application for a second mortgage on your house or flat.

If you’re thinking of taking out a second mortgage, you can talk to an advisor at our partner Fluent, who can help you understand if a second-charge mortgage is right for you. They’ll help you find the right deal for you, whether it’s for a second-charge mortgage or a remortgage.

Give their friendly staff a call on 0800 009 3342.

How long does a second charge mortgage take?

Taking out a second mortgage on your house or flat is usually a lot quicker than securing a first mortgage – some lenders even claim they can clear your funds in a matter of days. In most cases, you should have the money within three to four weeks.

When comparing second charge mortgage deals, remember to always look at the total cost, including any fees. You should also check for early repayment charges.

Can I get a mortgage on a second property?

You can get a second mortgage to pay for another property if you can prove you can afford the repayments. If you want to keep the property for personal use you’ll need a second home mortgage, and if you plan to rent it out you’ll need a buy-to-let mortgage.

With a second home mortgage, you’ll have to show your household income is high enough to afford the repayments on both it and your original mortgage. With a buy-to-let mortgage, you’ll usually have to show the rent will be 25% or 30% higher than the mortgage repayments.

Your home may be repossessed if you do not keep up repayments on your mortgage

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