What is a second charge mortgage?
A second charge mortgage involves getting a loan that is secured on any property you own (both investment buy to let properties and your residential property) your home in addition to your main mortgage. It can be used to raise finance on your existing property or finance a new property that is different to your residential home.
Essentially, it’s like having two mortgages on the same home – and if you fail to keep up with repayments on your second charge loan, your first property may be at risk of repossession.
Commonly known as ‘second home mortgages,’ it is a very fast growing industry in the UK and typically used by homeowners to raise money for home improvements, large purchases, debt consolidation or investment purposes.
A number of ‘buy to let’ investors have been using second charge mortgages for years as their ‘secret source of funds’ but now it is of particular significance. Why?
In 2008 when the financial crisis took hold the Bank of England rapidly reduced the base rate to less than 1%. This meant that a number of property owners and property investors saw their repayments on their current mortgage drastically reduce. Many property owners had equity tied up in their property portfolio; but there was a problem. To release the equity they would have to re-mortgage their property and lose the highly favorable rate they were currently on with their existing lender. The arrival of second charge mortgages solved this problem. Now a property owner could retain their existing mortgage rate with their existing lender but still release some or all of the equity in the property with a second charge mortgage.
2nd charge mortgages by numbers
- Loans range from £5,000 to £2.5m
- Interest rates start at 4.95%
- Basic term is three to 30 years
- Second charge lending grew in 2014 by 27% to £603m
- Average second charge loan amount is £61,000
How much interest will I pay?
The average interest rate is around 4.95% but this rate has been decreasing over time as second charge mortgages have been become more main stream and mortgage providers have become more competitive. How much you will pay for your second mortgage will depend on your loan to value (LTV) and how much equity you have in your first property to put towards your second mortgage.
The interest rate for your second mortgage will usually be a little more because your first mortgage repayments must always be satisfied first. So lenders consider that if you have any financial issues, you will be more likely to pay for your first mortgage than your second – so slightly higher interest rates allows them to manage the risk of default.
How is a second charge mortgage different to a remortgage?
A second charge mortgage is different to remortgaging because it allows you to raise finance for an additional property whilst keeping your existing lender and the mortgage rate you are on with them in place whereas remortgaging is commonly used to get a completely new mortgage deal on your existing homethe properties you own. Since the base rate and interest rates change from year to year, homeowners consider remortgaging as a way to find a better rate and take advantage of the introductory schemes offered by mortgage providers. Read more about remortgaging here
When is a second charge mortgage a good idea?
If you have a lot of equity in your current property and are on a very good mortgage interest rate with your existing lender, a second charge loan will allow you to borrow a larger amount without changing your existing lender and at very competitive rates. This can be a great way to raise finance for any extensions or additions you would like to make to your house or pay off any outstanding debts.
Getting a second charge mortgage is a good idea if your current deal makes its very expensive for you to remortgage. Due to high early payment charges in your contract, it could be more beneficial to get a second charge mortgage rather than opt out of your current contract and remortgage.
If the credit rating of you or your partner has worsened since you started your first charge mortgage, you could pay a higher rate to remortgage. Since a second charge mortgage uses the equity from your first property, you may be able to access better rates.
Similarly, if your credit rating or circumstances make it hard to apply for a personal loan, it may be easier to get the money you need through a second charge loan that is secured on your house.
When is a second charge mortgage a bad idea?
A second charge loan is not recommended for those already struggling to keep up with their first mortgage repayments. Failing to keep up with repayments can lead to repossession of your home, increases default charges and have a negative impact on your credit score. With this in mind, if you are finding it hard to keep up with your current mortgage plan, it can be very risky to take on the responsibility of a second mortgage.
In addition, whilst a second mortgage can be a good way to raise money to consolidate your debts, one’s personal financial situation should be taken into consideration beforehand. Whilst accessing finance can help pay off other loans and credit cards, you have to think about a way to pay off the second mortgage too. By using this secured loan to pay off debts, you are taking outstanding payments that are unsecured and making them secured and if you fail to keep up, your property could be at serious risk.
How to find the best second charge mortgage rate in the UK
When it comes to finding the best second charge mortgages rates, brokers and comparison sites are usually the first port of call as dealing directly with banks and lending institutions is uncommon for this particular type of loan.
Fortunately, working with an intermediary like Quiddi Compare allows you to get the best rate by comparing deals for multiple mortgage providers in the industry.
Our mortgage calculator can help you find the best second charge mortgage rates by entering a few basic details. The service is completely free to use and we won’t pass on your details to any other companies without your permission. The calculator allows you to find the best deal based on crucial factors including:
APR and interest rate – we are committed to finding you the most competitive APR and interest rate available and giving you the option of different mortgage terms.
Arrangement fees – we do not charge any arrangement fees for finding you a loan but these will be applicable if you take out a new mortgage. We will take the arrangement fees into consideration and calculate whether it works out to be most cost effective for you to remortgage or get a second mortgage.
Introductory periods – the mortgage providers we feature offer competitive introductory periods so that you can make the most of a new second home mortgage. The bonus period of up to 5 years includes a lower interest rate, cash back and nectar points.
Ask for permission
Finally, you may need to ask your current mortgage provider for permission to take out a second mortgage. Some mortgage companies have restrictions in their policies and they don’t want you to take out a second mortgage so it is always worth asking before you apply.
The advertised rate is 1.95%. However this rate will not be available to everyone and will depend on your individual circumstances and the loan to value ratio of your mortgage.
THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE OR ANY OTHER DEBT SECURED ON IT.
Some partners may charge you a fee for helping you find a Mortgage or Secured Loan or other services they provide. MAKE SURE you check with the company before agreeing to any service if they charge you a fee and what the terms are.
Warning: Late repayment can cause you serious money problems. For help, go to moneyadviceservice.org.uk QuiddiCompare does not charge a fee and does not provide any financial advice relating to mortgages. However we may on occasion receive commissions from IFA’s and mortgage providers, brokers and intermediaries for introducing you to them.
The content of this site is meant to be informational, and it should not be considered financial advice. – See more at: quiddicompare.co.uk/mortgages