Second-Charge Mortgages

Second-charge mortgages (also known as secured loans) are a popular alternative to remortgaging, particularly if your current mortgage deal has hefty penalties for switching or you’re already on a reasonable interest rate and don’t want to lose it by moving to a new mortgage lender. 

What is a second-charge mortgage?

As the name suggests, a second-charge mortgage is an additional home loan secured against the same property and is entirely separate from your original (first) mortgage. Also known as a secured loan, the amount you can borrow for a second-charge mortgage is based on the equity in your property. 

You can have different lenders for each loan you have secured against your home. The term ‘second charge’ simply means that if the property ever needs to be sold, your existing ‘first charge’ mortgage takes priority for repayment, followed by the second-charge mortgage.  

Second-charge mortgages differ from remortgaging for two main reasons:

• Remortgaging is where you switch your existing first-charge mortgage from one lender to another to benefit from a cheaper interest rate when your current deal expires

• Remortgaging to release equity is where you borrow more money on top of your existing mortgage, increasing your current monthly repayments in the process, whereas a second charge mortgage is a separate loan with its own repayment

So, if you have both a first and second-charge mortgage secured against your property, you have two separate home loans with different repayment terms.

For example, your first charge mortgage term could be 25 years, and five years into that term, you take out a second charge mortgage for 10 years. This means your second charge mortgage will be repaid ten years before your first mortgage is due to be finished. 

How do second-charge mortgages work?

Second-charge mortgages are only available to homeowners with an existing mortgage already secured against their property. Unlike your first mortgage, no deposit is required for your second. Instead, the amount you can borrow will depend on the current loan-to-value ratio (LTV) and how much equity is available. 

The lower your current LTV, the more you’ll be able to borrow from the equity in your property for a second-charge mortgage. Let’s say your home is worth £250,000, and the remaining balance on your first charge mortgage is £150,000. This means the current LTV is 60% (£150,000 / £250,000 x 100) and the available equity is £100,000. 

You can then unlock a portion of the available equity in your property through a second charge mortgage to raise a cash lump sum, which can be used for a whole host of reasons, such as: 

• Home and/or garden renovations

• To finance a sizeable personal purchase - a new car/family wedding/dream holiday

• To pay for your child’s education fees

• To fund a business investment

• A deposit for a second property

• Consolidating other debts within one secured loan

• To buy someone out of a property 

How much can you borrow for a second-charge mortgage?

This will vary from lender to lender. Some lenders will allow a combined loan-to-value ratio (LTV) of up to 95%, including both your first-charge mortgage and the amount you want to borrow for a second-charge mortgage. 

So, for example, if your house is worth £300,000 and your first-charge mortgage balance is £150,000, the current LTV would be 50%. If a mortgage lender was willing to let you borrow up to 95% LTV, this would mean you could potentially borrow an additional £135,000 for your second-charge mortgage (£150,000 + £135,000 = £285,000 = 95% of £300,000). 

The amount you’ll be able to borrow will depend on the overall strength of your second mortgage application, particularly the equity available in your property, the mortgage lender’s affordability assessment and your credit history. 

In addition, there are several other important factors to consider before you apply:   

• The loan-to-value ratio (LTV). The additional amount you want to borrow will have to fit within the maximum LTV offered by a mortgage lender for both your first and second mortgages combined.

• Your income and outgoings. A mortgage lender will want to know if you can afford the repayments for both your first and second mortgages. They do this by checking you have enough monthly disposable income to cover the repayments after all other outgoings have been taken into account. 

• Your credit history. Mortgage lenders will review your Credit Report before deciding how much you can borrow for a second mortgage. A low credit score could reduce the number of lenders willing to consider your application. 

• First charge mortgage lender. You will need to seek the permission of your first-charge mortgage before your second mortgage can be approved. They will want assurance you can afford the repayments for both loans. 

If all the factors and criteria outlined above seem daunting, don’t worry! This is where we can help. 

Our Mortgage Experts will be able to refer your request to one of our third-party partners who have arranged countless second-charge mortgages for people with similar requirements. All you need to do is make an enquiry, and we’ll contact you to get started. 

Are second-charge mortgages a good idea?

Second-charge mortgages are a good alternative if you’re looking to borrow an amount above the maximum allowed for personal loans (usually £25,000+), and remortgaging to release equity means either paying a hefty fee to switch or you’re already on a reasonable interest rate with your current deal.  

There are benefits and potential downsides to second-charge mortgages, all of which should be carefully considered before proceeding. 

Benefits

• Gives you access to the equity in your property as a cash lump sum

• Allows you to keep your existing mortgage deal and interest rate in place rather than break these terms by remortgaging to release equity and paying an early repayment charge (ERC)

• You don’t have to amend any other terms on your first charge mortgage to borrow more money

• Depending on how much equity is available in your property, you could borrow more than you might through a personal loan

Drawbacks

• Two mortgage payments can be harder to manage than one, and if you fall behind with your repayments, there could be the risk of repossession

• Second-charge mortgage rates tend to be higher than for remortgaging

• There will be additional costs and charges involved when you take out a second charge loan

• If you’ve only recently moved house and taken out your first charge mortgage, there may not be enough equity yet in your property to borrow the amount you need

Are second-charge mortgage rates higher than first-charge mortgages?

Second-charge mortgage rates tend to be higher than for first mortgages. However, they can also be cheaper than some other alternatives. If remortgaging to release equity means you have to pay a large fee, a second secured loan could be the most viable option. 

It also depends on the mortgage lender you apply with. This is where using the services of an experienced mortgage broker (like us!) can make such a difference. They can help you identify the right mortgage lenders offering the most competitive rate for this type of borrowing. 

What are the alternatives?

Before you make a final decision to apply for a second-charge mortgage, it’s worth considering all the alternatives, including: 

• Remortgaging. If you don’t need to borrow money urgently and your existing mortgage deal expires shortly, it may be worth waiting and releasing equity when you remortgage if the rates available are more competitive than for a secured loan. 

• Personal loan or credit card. If the lump sums you need are relatively small, you could apply for a personal loan or use a credit card with a preferential interest rate rather than getting a second-charge mortgage. Both these options allow you to repay the debt over a shorter period, meaning you should pay less interest overall. 

• Cash savings. If you have enough cash in your account to cover the cost of the purchase you want to make, this option avoids repaying any interest and charges that apply with a second-charge mortgage. 

Can you get a second-charge mortgage with bad credit?

If you’ve had bad credit since applying for your first-charge mortgage, getting a second mortgage could be a bit more complicated, but it is possible. This will depend on how much the bad credit has affected your credit score, when it happened, and the amount involved. 

Several mortgage lenders (all of which have strong working relationships with us) specialise in helping people with bad credit and assess applications case-by-case. You may have to pay a slightly higher interest rate and accept a lower loan-to-value (LTV). However, this may be worthwhile in the long run if the second mortgage allows you to make the purchase you need.