Second charge mortgages explained

Second charge mortgages

If you’re a homeowner and you’re wanting to make home improvements, for example, you may be able to benefit from taking out a 2nd mortgage to cover the costs.

Instead of remortgaging your home, you can effectively have two mortgages on the go which will allow you to essentially borrow money from your home to cover costs such as paying for home improvements in order to increase the value of your home.

In our guide below, we explain some of the second charge mortgage advantages and disadvantages, how it works, plus what it means to get a mortgage on a second property and the difference between a remortgage and a second charge mortgage.

What is a second charge mortgage?

A second charge mortgage is a type of secured loan that enables you to use the capital/equity in your home as collateral and it’s based on the difference between the value of your home and the amount of money that you still owe on your first, original mortgage.

It’s an alternative to remortgaging your home as you will effectively have two mortgages on your property that you will need to pay back and if you fail to make the repayments for both mortgages, you could risk your home being repossessed.

Can I get a second charge mortgage?

While you don’t necessarily have to live in the property to take out a second mortgage, you must already be a homeowner to do so. Second charge mortgages can also be taken out on second homes, but you must have some capital built up in your home to qualify.

Reasons for getting a second mortgage

The most common reason for getting a second mortgage is to pay for home improvements so that you can increase the value of your home, but some people also take them out in order to pay for things like a wedding, starting a business or to purchase a holiday home.

Before you take out a second charge mortgage, it’s important to be aware of the risks involved with having two mortgages that need paying back.

Second charge mortgage eligibility

To qualify for a second charge mortgage, you must be able to show how much capital/equity you have in your home; this is the difference between the value of your property and the amount that you still owe on your home.

You must also obtain permission from your current mortgage provider when you apply for a second mortgage. 

You can get a second charge mortgage from most UK banks and building societies.

How much money can you borrow with a second charge mortgage?

The amount that you’re able to borrow with a second charge mortgage usually depends on your income and the amount of equity you have in your home.

The minimum amount you will usually be able to borrow is £1,000, but depending on your income and capital in your home, you might be able to borrow the full amount of capital that you have, although some providers will cap the amount that you can borrow at 75% or 80%.

How much does it cost to get a second mortgage?

You can usually expect to have to pay higher interest rates on your second mortgage than your first. This is because first charge lenders have priority over second charge lenders if it comes to having your home repossessed and they will be paid first if your home has to be sold to cover the loan, so second charge lenders usually charge higher interest rates to cover the risk.

The pros and cons of a second charge mortgage

There are various pros and cons of a second charge mortgage that you should be aware of before committing to taking one out.

Pros

  • You’re able to keep your existing mortgage which can be of great value, particularly if your credit rating has gone down or interest rates have gone up.
  • Secured loans (such as a second charge mortgage) are usually easier to obtain than unsecured personal loans.
  • You’re not required to extend the term of your existing mortgage deal.
  • You don’t have to worry about paying early repayment charges or any other penalties as you would if you remortgage.

Cons

  • You will usually have to pay a higher interest rate than you did with your original mortgage.
  • You will be required to pay off both your mortgages in full if you move house.
  • If you fall behind on your repayments for both mortgages, you could risk losing your home.

Second charge mortgage alternatives

If you’re thinking about getting a second charge mortgage, but you want to be aware of your other options as well, take a look at some of the alternatives to a second mortgage below.

  • Using your savings to pay for whatever a second mortgage was going to cover.
  • Remortgage your home for a larger amount.
  • Apply for a personal loan.

Can a mortgage company refuse a second charge application?

It is possible for a mortgage lender to refuse a second charge mortgage if they think that it poses too much risk for them. For example, if you’re unable to make your repayments and your home was to be repossessed, the mortgage lender may make a loss on the sale which could lead them to refuse you a second charge mortgage. 

Are second charge mortgages a good idea?

Second charge mortgages can be a good idea, providing that you’ve weighed up the advantages and disadvantages of them and you know that it’s the right decision for you. 

While second charge mortgages usually come with higher interest rates, they can be a good alternative to remortgaging your home, but it’s imperative that you can pay back both mortgage repayments otherwise you might face your home being repossessed.

Before you commit to taking out a second mortgage, compare the pros and cons of doing so and consider your alternatives to see if there would be a more suitable option for you.

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