Second Charge Mortgages- everything you need to know

 
Second charge mortgages are regarded as the main alternative to re-mortgaging in order to raise additional finance, by taking advantage of the equity within a property you currently own and have an existing mortgage attached.
A second mortgage is separate to your original mortgage and can be a good way to access extra funds without re-mortgaging. However, it will mean you have two mortgages to pay off on the property.
 

Why you might consider a 2nd charge mortgage

 

  • Renovations and home improvements
  • Debt consolidation
  • Purchase a new car
  • Holidays
  • Weddings
  • University fees
  • Deposit for a buy to let purchase
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    Advantages of a 2nd charge mortgage

     

  • Independent from other finance – A second charge sits behind your first mortgage.
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  • Borrowing potential – A second charge mortgage will allow you to borrow higher amounts because the loan is secured by your home. Generally, up to a maximum 85% of the value of your home subject to lenders criteria and assessment.
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  • Flexibility – A second charge mortgage will allow you to borrow higher amounts because the loan is secured by your home. Generally, up to a maximum 85% of the value of your home subject to lenders criteria and assessment.
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  • Rates – Starting from around 3.79% (rates can change at any time) – this also allows you to keep an existing low interest rate you already have on your current mortgage.
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  • Timescale – Second charge mortgages can be processed much faster than a first charge mortgage
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    Disadvantages of a 2nd charge mortgage

     

  • Debts over a longer period – Stretching your debts to a longer time frame increases the overall cost.
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  • Funds raised against your property –When your home is used as collateral, it can be repossessed if you cannot keep up with the payments.
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  • Higher Rates – You will generally pay a higher interest rate than on your first mortgage, this is because this type of lender does not have as much collateral in your home as your primary lender does.
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    Read about Mr & Mrs Shah’s story

     
    Second charge mortgages can be considered risky and have higher charges, however, let us look at a recent case we had with Mr & Mrs Shah, where we can see a second charge was the best option.
     
    Mr & Mrs Shah were looking to raise funds for their son’s wedding for an amount of £75,000. They needed these funds as soon as possible so that they can start booking venues and start wedding shopping. If the clients re-mortgaged their property, they would have had to pay a high early repayment charge to come out of their existing deal.
     
    Mr & Mrs Shah:
    Residential property value – £500,000.
    Current mortgage balance – £150,000.
    Repayment mortgage.
    Current rate – 1.99% fixed.
    Current monthly payment – £635.
    Outstanding term of 25 years.
    The mortgage is on a fixed rate which ends in July 2022.
     

    Our Solution

     
    Mr & Mrs Shah were happy that they could raise funds for their son’s wedding and when the first charge mortgage is coming up for renewal in July 2022 Mr & Mrs Shah will combine all balances and re-mortgage on a favourable rate with another lender, as the second charge will not have any early repayment charges to exit.
     

    Some frequently asked questions we received on second charge mortgages as mortgage brokers:

     
    Q – Can I only do this on a residential property?
    A – No, you can take out a second charge mortgage on buy-to let properties and second homes. You will just need to get permission from your current mortgage lender.
     
    Q– Are second charge mortgages regulated?
    A– Second charge mortgages are both regulated and unregulated contracts.
     
    Q – Can I sell a property with a second charge mortgage?
    A – Yes, you can sell, but there may be penalties depending on the second charge product.
     
    If you are thinking about taking out a second charge mortgage and would like to discuss your options, please get in touch to speak to one of our experienced mortgage brokers.
     
    This article was written by our mortgage adviser Mandip Rudki.
     
    Important: Your home or property could be repossessed if you do not keep up repayments on your mortgage.