Second charge mortgage or remortgage? | moneyfacts.co.uk

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Published: 29/01/2019

At a glance

  • There are numerous remortgage offers available, meaning you should be able to find a competitive remortgage deal.
  • Check for any early repayment charges you may incur by remortgaging.
  • Second charge mortgages may be a good option if your credit rating has fallen below the required level for your current mortgage lender or if you do not meet their mortgage affordability requirements.
  • Your home will be at risk if you don’t keep up payments on a second charge mortgage.

What are second charge mortgages and what is remortgaging?

Second charge mortgages are a type of secured loan taken out against the equity available in your current home, after any current money owed on a  mortgage is deducted. These can also be called homeowner loans. In simple terms, your mortgage lender has a 'first charge' against your home, meaning should you default they have first claim on the proceeds from the sale of the property. The secured loan is then a 'second charge' against the property. This means the lender of the secured loan has to wait until any debt is recovered by the first mortgage lender before they can then cover their outstanding debt. 

Remortgaging is concerned with paying off an existing mortgage with a new mortgage arrangement – either from your existing mortgage provider or a new lender. This is very common and might be done for several reasons but principally it occurs when you reach the end of a current mortgage deal. If your current mortgage deal ends, your lender will move you to their standard variable rate (SVR); this is usually higher than other mortgage rates in the market. You can also use a remortgage for home improvements or for other large purchases. If you have a fixed rate mortgage, then you should check whether any early repayment charges will be incurred by remortgaging your current debt and taking on any additional borrowing. It may be cheaper to ask your current lender for a further advance. This runs alongside your existing mortgage and will have its own mortgage interest rate that is separate to your current mortgage.

You can look at a remortgage comparison by looking at our best mortgage deals.

How do second charge mortgages and remortgaging work?

Both types of mortgage are only available to homeowners.

For second charge mortgages, you will need to have a sum of equity in your property that is at least equal to the amount of the loan you intend to secure against it. For example, while you could ask for £25,000 loan against £100,000 of equity, you couldn’t borrow over £100,000. As this is a loan secured against your property (even if you don’t live there) you must keep up repayments or your home will be at risk.

 A remortgage deal is typically for the whole amount of the existing mortgage and can be chosen from a range of existing products and deals from any lender. As with any mortgage, the money borrowed is secured against the value of your home, meaning you could be at risk of losing your property if you fail to keep up with payments.

Should I speak to a mortgage broker?

Mortgage brokers remove a lot of the paperwork and hassle of getting a mortgage, as well as helping you access exclusive products and rates that aren’t available to the public. Mortgage brokers are regulated by the Financial Conduct Authority (FCA) and are required to pass specific qualifications before they can give you advice.

 

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Your home may be repossessed if you do not keep up repayments on your mortgage.

What are the benefits and disadvantages for second charge mortgages and remortgaging?

Broadly speaking, second charge mortgages can be considered as ‘secured loans’ whereas a remortgage is concerned with the refinancing of an existing mortgage deal. While both are a good way of releasing extra funds against your property, it should be noted that the property you are financing against will be at risk of repossession if you do not keep up with your repayments.

Pros and cons of second charge mortgages

  • Could be an option for debt consolidation or to fund larger home improvements depending on your credit status.
  • Allows you the option of interest-only for the additional borrowing and helps to reduce monthly payments on the additional borrowing.
  • Rates for second charge mortgages are usually higher compared to remortgaging rates.
  • Second charge mortgages are more complex as they are a separate to your existing mortgage. You will need to keep up repayments on two different mortgages.

Moneyfacts tip

Moneyfacts tip Leanne Macardle

Second charge mortgages are also called secured loans. Find out more and see the best secured loans rates.

Pros and cons of remortgaging

  • Remortgaging helps to avoid paying higher rates on a lender’s SVR.
  • A further advance with your current lender may be at a lower interest rate than a separate second charge mortgage.
  • If your current mortgage is on a lifetime tracker rate, your lender may want you to remortgage your whole mortgage and move it to a higher rate.

Which is the better option for me?

The best option for you is influenced by several factors. For example, you may not want to remortgage your whole property due to having a lifetime tracker rate, or you may wish to have the additional borrowing on interest-only but want to continue to repay against your original mortgage.  It could be that your personal circumstances have changed, making it harder to meet affordability requirements for a remortgage, or your credit score has dropped below your current lenders’ requirements.

 

Remortgaging on the other hand is primarily used to pay off an existing mortgage by moving to a better deal, either from your current provider or a new lender, but is also a great way to take advantage of a reduced monthly payment or to borrow some extra funds to carry out property improvements.

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.

At a glance

  • There are numerous remortgage offers available, meaning you should be able to find a competitive remortgage deal.
  • Check for any early repayment charges you may incur by remortgaging.
  • Second charge mortgages may be a good option if your credit rating has fallen below the required level for your current mortgage lender or if you do not meet their mortgage affordability requirements.
  • Your home will be at risk if you don’t keep up payments on a second charge mortgage.

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