Is a Second Charge Mortgage Right for You?

Is a Second Charge Mortgage Right for You?
July 17, 2019 Felicity Anderson

Is a Second Charge Mortgage Right for You?

The number of homeowners taking out a second mortgage is on the rise.

According to figures from the Finance & Leasing Association (FLA) the value of new business from second mortgages increased by a staggering 23% to £108 million in May this year.

Wondering if taking on another mortgage is right for you? Here CashLady looks in more detail at what they offer and what to consider before applying for one.

What is a second charge mortgage?

Also known as a second mortgage, people use this as an alternative to re-mortgaging their property when looking to release equity and access funds.

Remortgaging

With remortgaging you agree to a completely new mortgage that replaces your existing loan, potentially unlocking the equity that you have built up in the property.

This involves taking out a new loan, with new terms and conditions and interest rates, to completely pay off your existing mortgage.

A second mortgage

This is completely different. It allows you to use any equity you have in your home as security against an additional loan.

It runs alongside your existing mortgage, meaning that you will have two mortgages on your property.

How a second charge mortgage works

It can be a loan of anything from £1,000 upwards, depending on how much equity you have in your home.

Equity is the percentage of your property owned outright by you, which is the value of the home minus any mortgage owed on it.

For example, if your home is worth £200,000 and you have £150,000 left to pay, then you have £50,000 in equity.

£50,000 is then the maximum amount that you can borrow and is secured against your home.

Why get a second mortgage?

The loan can be used like a remortgage or personal loan to raise cash for things like home improvements.

Typically, this type of borrowing is used by people who are benefiting from a good rate and don’t want to remortgage as a way to unlock their equity.

Others use it as there can be expensive charges for repaying a mortgage early, or because they have poor credit and might be unable to find a better deal.

Is a second charge mortgage right for you?

Is a Second Charge Mortgage Right for You?

Borrowing in this way can allow you to access funds when you need them and is potentially cheaper than remortgaging or using another type of borrowing.

Failing to repay, however, could mean losing your home and so you need to be sure that you can afford a second mortgage.

Consider your financial circumstances.

If you are struggling to repay your existing mortgage each month then you might not manage the additional repayments.

According to the Finance and Leasing Association, 447 properties were repossessed by second charge lenders in 2014.

You may also want to think twice if you plan to use the funds to pay off smaller debts, such as credit cards or unsecured loans.

This type of loan can run for as long as 25 years, so you could end up paying far more interest in the long term.

It also might not be worth the risk of converting unsecured credit into secured credit on your property, which could increase the chances of losing your home.

What next?

Before agreeing to anything, it’s best to speak to a qualified advisor who will help assess your finances and find a loan that suits your needs.

They will follow rules set out by the Financial Conduct Authority (FCA) that are there to protect you and help ensure that you get a loan that’s right for you.

You don’t need to take out a second loan with your existing mortgage provider so you can shop around for the best deals and rates.