Leanne Macardle

Leanne Macardle

Editor
Published: 29/01/2019

At a glance

  • A second charge mortgage is a secured loan that uses your existing home as security.
  • You need to be a homeowner with an existing mortgage, but you don't have to be living in the property.
  • When you a take a second charge mortgage, you have two mortgages on your home with your first mortgage always taking precedence.
  • Even if you have a poor credit rating, you may still be able to secure a second charge mortgage.

What is a second charge mortgage?

Second charge mortgages (sometimes just called 'second mortgages') are a type of secured loan that sits on top of your main (or 'first') mortgage. If you think of a normal residential mortgage as a secured loan on the property you are buying, then a second charge mortgage is a secured loan on the property you already have.

Second mortgages are commonly used as an alternative to remortgaging or taking out a personal loan as a method of raising money. However, if you get a second charge mortgage, you effectively have two mortgages to pay off, so it's important to understand the risks.

Why get a second charge mortgage?

Second charge mortgages are sometimes used as an alternative to remortgaging or getting a personal loan. There are many reasons why they may be used, including:

  • If your credit rating has decreased. Remortgaging in this case may cause you to pay more interest on your whole mortgage.
  • If your mortgage has an early repayment fee. Early repayment fees are usually a percentage-based fee so will depend on the size of your existing mortgage, but they could be thousands of pounds, in which case, it might work out cheaper to get a second mortgage instead.
  • If you are finding it hard to get approved for a personal loan or other forms of unsecured borrowing.

What is the difference between a second mortgage and a remortgage?

Remortgaging to get a lump sum means taking out a new mortgage for the value of your current mortgage as well as the extra amount of cash you want to borrow. So, instead of having a mortgage and a loan, you just get one bigger mortgage. For some people, this makes budgeting more straightforward.

However, a second mortgage can be thought of as a homeowner loan that you have in addition to your existing mortgage. It uses the equity you have in your home as security, and essentially sits on top of your existing mortgage. While this means you will have two mortgages on your home, your first mortgage will always take precedence.

However, being unable to pay your second mortgage could also result in you losing the property, regardless of whether you manage to keep paying your 'first' mortgage. In this case, the first mortgage lender will be repaid first when the property is sold, and the second mortgage lender will then get their money back, assuming the property is still worth more than both mortgage amounts combined.

Am I eligible for a second charge mortgage?

In order to get a second charge mortgage, you do obviously need to be a homeowner with a mortgage on the property, but you don't actually need to be living in the property you want to take the second mortgage out on.

Bad credit isn't necessarily a roadblock to getting a second charge mortgage either. Even if you have a poor credit rating, you may still be able to get a second charge because the lender uses your existing home as security. However, you may be charged a higher rate than if you had a better credit rating.

Pros and cons of second charge mortgage guide

  • Early repayment flexibility. Other mortgage types, such as a fixed rate, further advance or remortgage, often have percentage-based early repayment fees that might be higher – so a second charge mortgage could work out cheaper if you need flexibility for a short period of time, even though the interest rates are generally higher than a first charge mortgage.
  • An alternative loan. A way of raising cash if you are finding it difficult to get approved for a personal loan or other forms of unsecured borrowing.
  • Lower credit scores. Because your existing home is used as security, a lower credit rating may not be a barrier to securing a second charge mortgage.
  • Your home could be at risk. As a second charge mortgage uses your home as security, failing to keep up payments could lead to you losing your home.
  • Uncompetitive rates. If you have a bad credit rating, you could end up paying a higher rate of interest on the second charge mortgage – always consider further advances from your existing lender first.
  • Overall cost. While monthly payments might be more affordable, you may end up paying more over the long term.

Moneyfacts tip

Moneyfacts tip Leanne Macardle

While a second charge mortgage provides a way of raising extra cash, there are other alternatives that may suit your circumstances. Talk to a financial adviser before taking the plunge or speak to our preferred expert mortgage adviser.

Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.

two people in a business meeting

At a glance

  • A second charge mortgage is a secured loan that uses your existing home as security.
  • You need to be a homeowner with an existing mortgage, but you don't have to be living in the property.
  • When you a take a second charge mortgage, you have two mortgages on your home with your first mortgage always taking precedence.
  • Even if you have a poor credit rating, you may still be able to secure a second charge mortgage.

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