If you are you considering major home renovations including making green upgrades, or other large expenses then second charge mortgages, also known as secured loans, offer an alternative to traditional remortgaging or personal loans, also known as unsecured loans. This guide explains how second charge mortgages work, their advantages and disadvantages, and when they might be the right choice for you.
How do second charge mortgages work?
When you take out a second charge mortgage, you essentially secure another loan against your property’s equity. This means your home acts as collateral for the lender. If you cannot repay the second mortgage, the lender may instigate a process to repossess your property if appropriate. That is why you should always make a careful choice when taking out secured loans of this type.
What is a second charge mortgage?
A second charge mortgage is a type of secured loan that allows you to borrow additional funds against the equity in your property. Unlike re-mortgaging, your existing mortgage remains in place, and you make repayments on both loans simultaneously. The second refers to the position of the charge in relation to your main or primary mortgage.
Second charge mortgages are known by a variety of names and this can be confusing. For example a home equity loan is the name we prefer as it gives a clear indication of the source of the funding as it were. You can also use the term secured loan as the loan is secured on your property.
Why would you get a second charge mortgage?
Homeowners consider second charge mortgages for several reasons:
- Home Renovations or Repairs: Funding significant home improvements without disturbing your existing mortgage.
- Alternative to Personal Loans: Obtaining financing when personal loans are challenging, such as for self-employed individuals.
- Avoiding Early Repayment Charges (ERCs): Accessing funds without triggering high ERCs associated with early remortgaging.
Should I get second charge mortgage or a re-mortgage?
The decision between remortgaging and a second charge mortgage depends on your financial circumstances and market conditions. Consider factors like:
- Early Repayment Charges (ERCs): If your current mortgage has high ERCs, a second charge mortgage may be more cost-effective.
- Mortgage Interest Rates: Compare prevailing mortgage interest rates with second charge mortgage rates.
- Personal Circumstances: If remortgaging is difficult due to self-employment or credit rating changes, a second charge mortgage may be suitable.
Risks of a second charge mortgage
Carefully consider the potential risks associated with second charge mortgages:
- Higher Interest Rates: Second charge mortgages typically carry higher interest rates than first mortgages.
- Potential Additional Costs: The total cost may exceed remortgaging or personal loans, especially considering interest and ERCs.
- Risk of Repossession: Falling behind on repayments could lead to repossession, which could result in losing your home.
Could I loose my house if I don’t keep up to date with payments?
Yes, if you cannot make repayments on your second charge mortgage, the lender may repossess your property if appropriate. Therefore, carefully assess your affordability and consider potential changes in your financial situation before committing to a second charge mortgage. If in doubt make sure to access independent advice from a regulated mortgage broker.
Can a lender refuse my second charge mortgage application?
Yes, lenders can refuse second charge mortgage applications based on various factors, including:
- Existing Mortgage Approval: Permission from your existing mortgage lender is typically required.
- Affordability Checks: Meeting the second charge mortgage’s affordability criteria.
How much can I borrow?
The eligibility for a second charge mortgage depends on several factors, including:
- Income: Your ability to make regular repayments.
- Equity: The amount of equity available in your property.
- Overall Financial Situation: Your overall financial health and creditworthiness.
Lenders typically set maximum loan amounts as a percentage of your property’s equity. For instance, some lenders may cap the amount at 75% or 80% of the available equity.
The binding offer stage of an application
When a lender approves a second charge mortgage application, they will send you a binding offer. This is a formal document that outlines the terms and conditions of your loan. The lender is obligated to honour the terms of the offer for a certain period of time, typically seven days. This is called a reflection or cooling-off period.
A binding offer typically includes the following information:
- The amount of the loan
- The interest rate
- The repayment term
- Any fees associated with the loan
- The APRC (Annual Percentage Rate of Charge)
- A summary of the terms and conditions of the loan
A binding offer means that the lender is legally obligated to honour the terms of the offer for a certain period of time. This means that they cannot change the terms of the offer without your consent.
There are a few exceptions to a binding offer. For example, if the lender discovers that you provided false information on your mortgage application, they may be able to retract the offer. Additionally, if the lender’s funding costs change significantly, they may be able to renegotiate the terms of the offer.
Once you receive a binding offer, you should carefully review the terms and conditions of the loan. You should also compare the offer to other loans that you are considering. If you are happy with the offer, you can accept it by signing and returning the document to the lender. You do not have to wait until the end of the reflection period to accept the offer.
When comparing binding offers, be sure to pay attention to the following factors:
- The interest rate
- The fees associated with the loan
- The APRC
- The repayment term
- The customer service of the lender
It is important to shop around for the best mortgage deal before accepting a binding offer.
Can I use a second charge loan to release equity?
Yes, this is the idea. Second charge loans are often known by different names including secured loans, equity release or home equity loans. Be aware that they may function slightly differently depending on the type of loan and the lender. For more details on our available options, please visit our products page.
Some equity release plans, such as lifetime mortgages and home reversion plans, do not require regular monthly mortgage payments. Instead, the loan is repaid when the property is sold. Conversely, other equity release products, such as retirement interest-only mortgages, do require monthly payments. Similar to standard mortgages, second mortgages also necessitate monthly repayments over the loan term.
Second charge mortgages can provide access to funds for various purposes, but they also carry risks and potential costs. Carefully consider your circumstances, compare options, and seek professional financial advice before making a decision.
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