Second charge mortgages: Should this be your first choice?

Also known as secured loans, second charge mortgages are quickly becoming a mainstream form of lending. Right now, more and more homeowners are looking to them as an alternative to remortgaging or taking out a personal loan.

 

 

So, what is a second charge mortgage? Well, it’s essentially where the borrower’s home is used as security, helping them to raise funds against their property for a wide range of purposes. People often use them when they can’t get any more funding from their existing lender.

 

From home improvements and buying a new vehicle to bills and even paying for a wedding, there are a huge amount of reasons why people decide to take out a second charge mortgage.

 

One of the big advantages is that second charge mortgages allow homeowners to retain their current mortgage at a competitive interest rate. As a result, they are widely seen as the best option for people who have high early repayment charges on their existing mortgages.

 

A second charge mortgage could be a good option for a range of people. For example, someone who has recently become a contractor and needs to raise funds quickly, a property owner with a poor credit rating – and also people who are looking to raise capital against their UK home to purchase property overseas.

 

Second charge mortgages are certainly not without their risks, however. It’s important to remember that second charge mortgages still need to be repaid alongside your first mortgage.

 

And if the worst happens and your home is repossessed, lenders will recover funds in the order they were charged in. If you’re thinking about this option, remember that just like any mortgage, failing to repay it could mean you’ll lose your home.

 

So, there are certainly positives and negatives to second charge mortgages. Are they the right way to go? To dig deeper, we’ve asked our expert second charge consultant Tammy Chalk a few questions.

 

Why would you get a second charge mortgage?
There are a number of reasons to apply for a second charge mortgage and they include:

  • Debt consolidation
  • Home improvements/extensions
  • Helping with university fees
  • Helping your family with a deposit for their first home
  • Buy-to-let property purchase
  • Children’s tuition fees
  • Payment of a tax bill
  • Transfer of equity
  • Lease extension

 

Who can apply for a second charge mortgage?
A second charge mortgage is open to a variety of borrowers, including contractors, freelancers and self-employed professionals, but there are stipulations. First and foremost, you must have an existing first charge mortgage on a property. You must also be 18 years old and over, as well as employed (in a contract or permanent work).

How do you apply for a second charge mortgage?

The second charge loan application process is similar to applying for a remortgage. A broker who specialises in second charge products will go to a panel of lenders to check the quote you get is competitive and applicable to your circumstances.

Most second charge lenders only accept business through a registered broker, and in nearly all instances the client does not need a solicitor to act for them – this can help expedite the process. This is different to remortgage applications, where a conveyancer or solicitor is usually needed.

What documents do you need?
Documents vary from lender to lender. Typically, they need a copy of your credit report and proof of income: for example, a copy of your contract if you are a contractor, HMRC documentation if you are self-employed and payslips if you are a PAYE employee.

If you are consolidating unsecured credit, you will also need a list of the debts credit you wish to clear. It is best to have these details ready when you go for your first talk with the lender

Next, when you get a loan recommendation, the lender will ask for some additional documents, such as bank statements, as well as application forms and other lender-specific documents.

 

How much can you borrow?

How much you can borrow depends on the existing equity in your home: in short, the percentage of your property that is owned outright by you.

You can calculate this by establishing the value of the mortgages you owe against the value of your home. For example, if you bought a house for £300,000 and you have £250,000 left to pay on the mortgage, then you have £50,000 equity. This can, however, change in response to shifting property demands – especially if your property increases in value.

Opting for a second charge mortgage or a secured loan will essentially allow you to get an approved loan secured against the equity in your property. Then, based on that you would be able to apply for a second charge, subject to underwriting and valuation by the lender.

In most cases, homeowners who choose a second charge mortgage or secured loan tend to borrow anything between £30,000 and £80,000. The more equity you have in your property, the more money you are likely to be able to borrow. Of course, applications are all reviewed on a case-by-case basis. And, like any other lending, all loans are subject to affordability calculations and credit status.

 

What are the pros and cons of a second charge mortgage?
A second charge mortgage is basically just another name for a homeowner loan: a loan that is secured to your property. And as with any loan of this kind, you must remember that if you stop making repayments, the lender has the right to repossess the property to take back what you owe. This is, of course, a worst-case scenario, but it’s important to bear in mind.

On the plus side, because the loan is secured against your home, it is often possible to borrow more than you could with a personal loan. Plus, you can spread your repayments over a longer term to make them more affordable. Lenders will also lend for pretty much any legal purpose, and are more flexible in terms of what you are using the money for.
 

What are the alternatives?

There are positives to second charge mortgages, but there are definitely risks too, so they are by no means for everyone. And there are several alternatives you can also consider, such as remortgaging, further advances and personal loans.

It’s always best to speak with a specialist before applying for any type of mortgage to make sure you understand the process and what’s involved. You should also make sure the mortgage or loan you’re applying for is the one that suits you best and that you are able to afford it.

*IPSE are not authorised to offer regulated mortgage advice. IPSE are introducers to CMME. Your home could be repossessed if you do not keep up repayments on your mortgage.

*CMME is a trading name of CMME Mortgages and Protection Limited. Authorised and regulated by the Financial Conduct Authority (FCA reg. 414798). Registered in England No. 04886692. Registered Office: Albany House, 5 Omega Park, Alton, Hampshire, GU34 2QE. Please be aware that Commercial Mortgages, Overseas Mortgages and some Buy-To-Let Mortgages are not regulated by the Financial Conduct Authority. Calls may be recorded for training and security purposes and to improve the quality of our services.

 

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