On this page:
- What is a second charge mortgage?
- Why get a second charge mortgage?
- What is the difference between a second mortgage and a remortgage?
- Am I eligible for 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. 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 form 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, 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 bad credit, 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.
Written by Leanne Macardle, last updated: 25/05/2018