Second charge mortgages could help finance the home improvement boom

By Marie Grundy, Managing Director Second Charge Mortgages, West One Loans

The pandemic has seen many people re-evaluate their living arrangements, from moving home to staying put and improving their surroundings.

What became the new normal of working from home highlighted the fact that many people needed more space if they were to live and work in the same house or flat. And for families with children, homeschooling the kids added extra pressure to the need for more room. 

Adding an extension, a loft or garage conversion or even in some cases digging down to create a basement or building upwards for a roof extension, became a priority for some homeowners. Others opted for new kitchens and bathrooms, double glazing, and general home and garden improvements.

Paying for home improvements

If you don't have the cash or savings tucked away, how do you pay for home improvements?

One option is a second charge mortgage. You must have a mortgage (also known as a first charge mortgage) to be considered for a second mortgage. This is taken out with a second charge lender and is separate to your first charge mortgage.

You must have equity in your home which means your mortgage is less than the value of the property. Most lenders require 15% equity, i.e. the combined total of your first and second mortgage must be 85% or less of the value of your home.

Why have two mortgages?

A second mortgage is usually used because it might be more cost effective than remortgaging. Most second mortgages are regulated by the Financial Conduct Authority so you will need to seek advice from a suitably qualified mortgage adviser who is able to advise on both first and second charge mortgages – not all do.

Another reason is speed as second charge usually does not involve conveyancing - the legal side of home buying - which can take three months or more. Conveyancing is the main reason home buying takes so long to complete and it is normally a requirement when remortgaging too. Once a second charge mortgage offer has been issued it is generally a much quicker process than a remortgage. Once the mortgage deed has been signed and returned it is quite normal for the money to be in your account the next day.

Often a second charge is used as an alternative to remortgaging and this is where a good broker should be able to advise on which option is best for you.

When is a second charge better than a remortgage?

As mortgage rates have been historically low for several years, many borrowers have a very competitive mortgage rate. If you want to remortgage and take more money out, you would need to change to a new product which might in some circumstances mean a higher rate of interest.

Mortgage rates in general are now creeping upwards following the rise in the Bank of England base rate from 0.1% in December to 0.5% now - and likely to increase further.

With a second charge mortgage you can keep the original mortgage with its competitive rate and the rest of the money you borrow will be charged at the second charge rate.

If you are thinking of remortgaging but there is still time left to run on the term, you may incur early repayment charges. For example, if you are three years into a five-year fixed rate mortgage, you may have to pay the lender to leave.

How much can I borrow on a second charge?

It depends on the lender as to how much you can borrow but at West One we will lend from £10,000 to £500,000 with an average loan size of around £60,000.

All loans are subject to an affordability assessment and lenders will take into account how you have conducted your financial affairs. A number of second charge lenders do not use credit scoring and instead look at your credit report, whilst taking the time to understand your individual circumstances when arriving at a lending decision. This means that if you have had previous issues with the conduct of your credit, you may still be able to access second charge finance.

What do borrowers typically use second charges for?

The most common reason for taking out a second charge mortgage is for debt consolidation followed by home improvements. It is important you receive advice from a suitably qualified adviser to assess whether a debt consolidation loan is right for you.

However, often it allows borrowers to clear items of unsecured credit which can really help to reduce monthly outgoings. This will become increasingly important to more and more households as we are starting to see income squeezed as a result of rising inflation and interest rates, notwithstanding the substantial increase in energy prices.

Second charges can generally be used for any legal purpose including business purposes, repayment of tax bills, bank of mum and dad transactions and school fees.

Since the pandemic, we have noticed more people with high value properties using second charge for high end home improvement projects but also towards a deposit or the outright purchase of a second home or investment property.

How long is a second charge mortgage?

Second charge mortgages can run from three to 30 years with a range of fixed and variable rate products with or without early repayment charges. You often have the option to make overpayments during the term of the loan so you can pay your loan off earlier or opt to reduce the monthly payments.

If you are thinking about home improvements or need to borrow money for another reason speak to a mortgage adviser who understands both first and second charge mortgages - especially if you need the funds fast.

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