Second Charge Mortgages in the UK

Mark Benson

Mark Benson

Money Savings Advice 2nd charge mortgages

A second charge mortgage, also known as a ‘second mortgage,’ as the name suggests, is a mortgage which is taken out, in the form of a mortgage and secondary to the property owner’s main, first charge mortgage.

However, much like a first charge mortgage, these specialised forms of finance are also secured on your property which therefore means that should you miss your repayments or default on the loan, your property may be repossessed.

What Is a Second Charge Mortgage?

Second charge mortgages are a second mortgage you take out on a property that you already have a mortgage on. They're suitable if you need funds and have built up sufficient equity from paying off your first mortgage.

One of the most common reasons for taking out second charge mortgages is as an alternative to remortgaging, which can sometimes prove costlier. Particularly in cases where there are additional early repayment charges to consider, a second charge mortgage allows property owners to borrow money against their property.

There are also tailored options when it comes to these second charge loans to help fund things like a child’s education, weddings, business needs and more besides.

A specialised form of property finance not available from most high street and mainstream lenders, these mortgages are still regulated and governed by the UK’s Financial Conduct Authority (FCA.)

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How Does a Second Charge Mortgage Work?

In order to be eligible for a second mortgage, you must be a homeowner and must have an existing mortgage in place [your first charge mortgage.] Furthermore, you should also own enough equity in the property to be able to borrow money against additional equity to that which the first charge mortgage is secured. 

You will also need to seek approval from your first charge lender who will get precedence over the loan and any repayments or repossessions. The second charge lender and the first charge mortgage provider will therefore need to agree on the terms of the second mortgage in order to enable you to borrow the necessary funds. 

The way in which second mortgages work in practice is that you will own your property and will be in the process of paying off a typical mortgage. Requiring additional funds, which you wish to secure against your property, a second charge mortgage may be applied for. However, these mortgages, unlike first charges do not need to be for property-related purposes.

Second charge mortgages are more accessible than people may be aware of and so long as you understand the process and the nature of this type of loan, you may be able to successfully acquire one.

Second Charge Mortgages Explained

You will need to own enough equity in the property to be able to borrow the second mortgage against, and many lenders may not allow a second charge on your property on all remaining equity.

For example, a property owner may have purchased a property worth £500,000 with a deposit of £100,000. Having paid off a portion of their mortgage (worth £400,000) and taking their deposit and rising property value into account, their property, after a few years becomes worth £525,000, with the homeowner owning equity worth £225,000.

Thus, the property owner requiring a second mortgage may be able to borrow against this equity.

How Much Can I Borrow With a Second Mortgage?

Second charge mortgages allow property owners to borrow potentially much less than a typical mortgage, with some lenders allowing loans as small as £1,000. Depending on the property value and equity owned, it is possible to borrow as much as £30 million, or potentially more.

You should take into account that unlike first charge mortgages, there are additional fees to take into consideration and the interest rate will be higher, with their loan not being for the purchase of your abode.

What Are the Differences Between a First and Second Charge Mortgage?

First charge mortgages are predominantly utilised to purchase a property, with the very same property being used as collateral for the loan, to secure the purchase. Typical mortgages are also cheaper than specialised forms of property finance such as second mortgages and therefore, the affordability checks involved when it comes to second mortgages can be more rigorous.

There are some key differences however to consider when comparing first charge and second charge mortgages:

  • Homeowner Status – Although first charge mortgages enable people to become homeowners or property owners, one does not need to be a homeowner to apply for the mortgage in question. When it comes to second mortgages, by their very nature, you must be a homeowner
  • Equity in a Property – Much like the need to be a homeowner, you must own sufficient equity in the property to be able to successfully acquire a second mortgage
  • Permissions – You will need to have gained the approval of your main mortgage lender, who will have precedence, in order to get a second mortgage; the first charge lender gets priority
  • Costs – as second mortgages are specialised forms of finance and are not ‘essential’ in the way your main mortgage will be, the cost of both acquiring [in the form of fees and valuations] and servicing [interest rates] will be significantly more than that for a first charge loan
  • Affordability Checks – Although the checks for any mortgage are rigorous and in-depth, with the loan amount likely to be many hundreds of thousands or even millions on pounds, second charge mortgage checks are additionally rigorous compared to first charge mortgages

Do I Need to Use a Second Charge Mortgage Broker?

When looking for first charge mortgages, for example as a prospective buyer of a property, you have many options, including brokers, online-based comparison portals and brokers, all of which have their merits. However, when it comes to second charge lenders, with the nature of the product as well as the processes to follow being a lot more specific, you will need to use a broker. As with all mortgages, the benefit of the broker is having access to a larger panel of lenders.

In the case of second mortgages, borrowers are unlikely to have access to the lenders they need and thus a broker should be sought. However, there are also online comparisons and brokerages which can do a similar job, often for lower costs.

How Much Does a Second Mortgage Cost?

Second mortgages are judged quite differently to first charge mortgages and do cost more with regards to interest as well as other fees.

Fees to consider when it comes to second charge mortgages include:

  • Broker Fees – Requiring a broker will also require borrowers to pay the relevant broker fees, for the broker to arrange the mortgage and the necessary processes for you
  • Lender’s Fees – As with most mortgages of all types, the lender will charge an ‘arrangement’ fee to deal with the administration and processing of the loan itself
  • Interest Rates – The interest rate on a second charge mortgage will be higher than a first charge mortgage. Therefore, the Annual Percentage Rate (APR) will be higher than that for a first charge mortgage. This will also mean your monthly repayments will be relatively higher
  • Valuation and Appraisal – With second charge mortgages requiring an additional valuation of your property to fully calculate your equity and what you can in fact borrow, you will need to pay for this valuation and appraisal process, which will be facilitated by the second charge lender and your broker

How Can Money Savings Advice Help You With A 2nd Mortgage?

Here at Money Savings Advice, we have partnered with some of the UK’s leading mortgage brokers. They have already helped thousands of people get the best mortgage deal and they can do the same for you.

Choosing an independent adviser means they won’t recommend a mortgage unless they are sure it is in your best interests. Their advice is also regulated by the FCA, which gives you an additional layer of protection.

If you would like to speak to one of these brokers who can provide you with a ‘whole market quote’ then click on the below and answer the very simple questions.

Money Savings Advice Author Mark Benson

Mark Benson

Mark has been writing professionally for over ten years for the financial sector. Having started in the financial world as a stock-broker in central London and then moving to equities trader Mark is one of our senior financial writers who has a vast knowledge of multiple financial sectors.

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