As the name implies, a second charge mortgage is a second loan which is secured against a property you own, whether that's your primary residence, a second home or even a buy-to-let investment property.
There are many reasons why a second mortgage might be worth considering alongside a remortgage and a further advance. A quick recap for you, a remortgage means you move your existing mortgage to a new lender and possibly borrow some more whereas a further advance is a top-up on your current mortgage with your existing lender. There are advantages and disadvantages for each, and in this article, we highlight the key aspects of second mortgages and why you may want to consider one.
What can you use a second mortgage for?
The list is pretty much endless, but there are a few things a lender would not permit. The vast majority of second mortgages are used to fund home improvements or consolidate debts, but we also help people looking to buy a car, pay for a wedding, start a business or buy a holiday home for example.
How does a second mortgage work?
You must have sufficient equity in a property, which you can put forward as security for the loan. Lenders can offer larger loan amounts and longer loan terms for this type of borrowing. You can typically expect to borrow up to 75% of the free equity you have. For example, if your home is worth £200,000 and you have £100,000 left on your main mortgage you have £100,000 equity. This means you could expect to be able to borrow up to around £75,000 as a second mortgage.
Unlike a personal or unsecured loan, a second mortgage is secured against your home, which means that your home is a risk if you cannot keep up with repayments.
When would I use a second mortgage over a personal loan, remortgage or further advance?
Interest rates on a remortgage or a further advance are likely to be less than on a second mortgage. This is because the second mortgage lender is second on the list to be repaid should your home have to be repossessed and sold. The risk is higher for the second mortgage provider so therefore, they charge a bit more. Conversely, interest rates on a personal loan are likely to be higher than on a second mortgage.
Usually, if you are looking to raise money, the default would be a personal loan, further advance or remortgage. However, if your credit status has deteriorated since you took your first mortgage you may find a personal loan, further advance or a remortgage difficult to get, this is where a second mortgage could be a good option for you. Additionally, if you are only looking to raise a small amount of money, putting this on a further advance or remortgage may mean a longer-term, which means you'll pay more interest overall. On a second mortgage, you could repay a small amount over just five years perhaps.
A word on debt consolidation
The chances are that if you are thinking about debt consolidation, then you could be worried that your debts have already gotten out of control or may do so soon. This typically happens when you build up a variety of unsecured debt such as personal loans, credit/store cards and car finance and the monthly repayments across this debt put a strain on your monthly income. Debt consolidation using a second mortgage can provide a lump sum to enable you to pay off all of your debts in one go and have one lower monthly repayment. Typically, the interest rate on a second mortgage will be lower than the unsecured debt you have, making it cost-effective.
It is becoming increasingly difficult to get debt consolidation finance using a further advance or a remortgage. This is because by the very nature of you wanting to consolidate your debts, the lender concludes that you are or may very soon be in financial difficulty and will assess the application already on the back foot. Second mortgage lenders often have more experience in dealing with customers needing to consolidate debt and may be more sympathetic to your circumstances and needs.
The critical thing is that if you are uncomfortable with your debt levels, admit it and do something about it before it becomes a real problem for you and leads to arrears, defaults and CCJs, all of which will have a significant impact on your credit status.
At Greenshoots Financial, we know that every client is different and whilst a second Mortgage may be the right solution for one client, it may not be for everyone. We take the time to get to know you, your goals and objectives for raising money and only then do we make a recommendation for you. Contact us today to see how we can help you fund that dream conservatory, convert your garage, consolidate your debts or buy that two-seater sports car you've always wanted.