By Marie Grundy, managing director, second charges at West One Loans, and a board member of the Society for Mortgage Professionals.
Not everyone has heard of a second charge mortgage but you can only take one out if you already have a first mortgage. But why have two mortgages on one property?
There are all sorts of reasons why someone would opt for a second mortgage and I am going to discuss some of them here.
What is a second charge mortgage?
A second charge mortgage is a loan secured against your home which allows you to release equity from your property.
For example, if your house is worth £400,000 and you have a mortgage left to pay of £300,000 that means you have £100,000 tied up in the house. You can tap into some of that £100,000 and release it in the form of a loan or second charge mortgage and use the money for a wide variety of purposes.
Why have a second charge mortgage?
Second charge is often used if there are restrictions on the first mortgage and can be a good alternative to remortgaging.
One of the most common uses for second charge is home improvements. You could ask your lender for a further advance but usually, the interest rate for the extra money is higher than your current mortgage.
You may be able to remortgage but if you are on a low-interest rate, the new remortgage rate may be higher. This is because you are borrowing more money so the loan-to-value (LTV) will go up. The higher the LTV, the higher the interest rate as you are deemed to be a more risky borrower.
If you are on a fixed interest rate and you want to redeem the mortgage there are likely to be early repayment charges to pay to get out of the contract.
Some borrowers have an interest-only mortgage which means they only pay the interest each month but still owe the original cost of the property. If a further advance is requested, lenders are likely to insist the borrower moves to a capital and repayment mortgage, which will significantly increase the monthly repayment.
A second charge mortgage can often be the cheaper option in all these sorts of cases. You stay on your low fixed interest rate on your first mortgage and take out a second charge for the amount you need.
What can a second charge mortgage be used for?
Loan purposes which can be considered for a second charge loan are:
Business purpose loans for trading companies
Outright purchase or to raise a deposit towards the purchase of another property such as a second home, holiday home, buy-to-let property
Gifting a deposit to a family member to help them onto the housing ladder – also known as the Bank of Mum and Dad
Repayment of tax bills
Repay a third party, for example, a bridging loan or further charge on the property
The Covid pandemic has brought some changes to the profile of a second charge borrower. At West One Loans we have seen a rise in larger loans for home improvements as people want to build more space, perhaps for an office.
There has also been more interest in second charge loans being used as a deposit for a second home, especially with people living in the cities who want a countryside or seaside retreat.
We are also seeing more Bank of Mum and Dad applications as parents want to help their children with the deposit to buy their first home. This can also be to boost their children’s deposit so they can afford a bigger property or one in a nicer area.
How do I get a second charge mortgage?
You must obtain advice from a suitably qualified mortgage adviser who will establish whether a second charge is right for you and there are also specialist second charge brokers who know the market inside out. They will know which lenders would suit your specific circumstances.
You will have to be able to prove you can afford the mortgage and the interest rate will depend on how much equity you have in your home.
It is now possible to get a second charge mortgage at 100% LTV for smaller loan sizes up to £35,000 but if you have more equity in your property, larger loan sizes up to £500,000 are available through a number of lenders providing you have sufficient income to meet the lender's affordability assessment.
Loan terms range from three to 30 years and you do not need to take a second charge out on the same term as your first charge mortgage. For example, if you have 15 years remaining on your first charge mortgage, you could take a second charge out over 20 years if your mortgage adviser recommends this is appropriate for your circumstances.
Second charge mortgages also offer flexible features such as the option of variable, fixed and discounted products as well as the availability of products without early repayment charges. In addition, most second charge lenders allow borrowers to overpay or make lump sum repayments so you can reduce the term or the monthly payment if required. Older borrowers who are already retired or approaching retirement age can also be considered for second charge finance.
There is a wide range of second charge lenders and loans to suit a wide range of borrowers such as the self-employed, older borrowers and those who have had past credit problems but affordability will always be the key for borrowers to be approved for a second charge mortgage. So if you need to unlock equity from your home it is a good idea to ask your mortgage adviser if a second charge would be right for you.
Marie Grundy is managing director, second charges at West One Loans, and a board member of the Society for Mortgage Professionals (SMP), which is part of the Chartered Insurance Institute. The SMP is a trade body which aims to raise professional standards among brokers in the mortgage and protection sector. West One Loans was the first specialist lender to join the SMP as an associate member.
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