Christmas is just over 80 days away and before Santa comes knocking you might be thinking about making some home improvements. Maybe you think it’s time for a new kitchen or bathroom or perhaps installing that conservatory you’ve always wanted – or indeed getting the chimney fixed for the man himself! – or just want to consolidate your debts into one manageable sum.
Saving up for those big money purchases is often hard to do and while a loan from your bank can be tempting, they can also turn out to be expensive.
But if you already own your own home – or have a mortgage on a property – and have a good credit history what about taking out a second charge?
A second charge mortgage is a loan taken out and secured on a property that already has a first mortgage and allows homeowners to borrow money using the equity in their property as security.
The “second charge” refers to the fact that this mortgage will be second in priority to the original mortgage in the event of a repossession or sale of the property – so the original loan will be repaid first.
Like the first mortgage, second charge mortgages are typically repaid over a term ranging from five to 25 years and you can choose between fixed or variable interest rates.
Whether you’re eligible for a second charge mortgage depends on a number of factors but primarily it comes down to how much equity you have in your property – the difference between your home’s current market value and the amount you owe on your first mortgage.
For example, if your home is worth £400,000 and you owe £200,000 on your first mortgage, you have £200,000 in equity.
There’s a whole raft of specialist lenders such as United Trust Bank, Pepper Money and Equifinance that might allow you to borrow against this equity alongside the first mortgage.
Just like your original mortgage, you’ll still have to make a monthly payment meaning that you’ll have two loans to repay which will increase your monthly financial obligations.
Generally, the interest rates on second charge mortgages will be higher than on first mortgages because the lender is taking on more risk as the original lender will get paid first if you sell your home or if it’s repossessed.
While it’s certainly not a type of lending that suits everyone taking on a second charge mortgage can offer several benefits over a standard loan or indeed remortgaging to release capital.
As it’s a second mortgage, you’ll be keeping your existing mortgage deal intact which could be a major bonus if you happen to be on a favourable interest rate which you’d have to forgo if you simply remortgaged.
And while first charge mortgage lenders may be stricter with credit history, second charge mortgage lenders can sometimes be more flexible.
If you've struggled to remortgage because of a poor credit score, you might still be able to access a second charge mortgage, especially if you have substantial equity.
Another reason to consider a second charge could be if your existing mortgage has heavy Early Repayment Charges but you need to access the equity in your property.
A second mortgage can help sidestep those and since the loan is secured against your property, lenders are often willing to offer larger amounts than with unsecured loans or credit cards. Which means a second mortgage can be a more affordable option if you're looking to borrow a significant sum.
But while there’s plenty of benefits to taking out a second charge mortgage, there are of course downsides, not least that your home will be at risk if you fail to keep up with repayments.
Your house can still be repossessed if you take out a second charge mortgage and fail to make repayments on either the first or second mortgage.
Interest rates will be higher compared to a first mortgage and the lender of the second charge mortgage will have a legal claim on your property, with both the first and second charge lenders able to initiate repossession proceedings if you default.
It’s also important to remember that over time higher interest rates can make the loan more expensive – certainly something to consider if you are using a second charge loan for debt consolidation.
Then there’s the set-up costs to take into consideration. There’ll be a number of fees to take into account – valuation fees to assess the value of your property; legal fees; arrangement fees and broker fees.
And of course, just as it is with your first mortgage, if property prices fall you could find yourself in negative equity.
Having a second charge mortgage can also complicate future financial decisions. If you want to remortgage or sell your home, you’ll need to settle both the first and second charge mortgages. This could make it harder to switch to a new mortgage deal or release further equity in your property.
Remember, if you’re considering taking a second charge loan or remortgaging, smart choices start with expert advice – speak to your mortgage adviser to get the best for your financial future.
YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
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