Second charge loans are gaining in popularity. According to recent figures, the total value of all new second charge mortgages granted in the year to November 2019 was £1.238 billion – an increase of 16% on the amount lent during the previous year – with a total of 27,747 such mortgages granted (up by 19%).
So, what are second charge loans?
Equity is the difference between the current market value of your home and the outstanding balance of your mortgage.
There are many reasons why you might want to unlock and free up that equity – perhaps to pay for home improvements. Or, if you are a landlord, to use the equity in one property to put a deposit on another.
How do they work?
Just as the term suggests, a second charge mortgage is a second loan on your home – or other property you own. The first charge is the principal loan, namely the first mortgage.
A second charge mortgage is a loan secured against the equity you own in your home. As the Money Advice Service explains, to raise that second charge loan you need to own the property or to have sufficient equity in it to offer as security for the new loan.
Although you need the equity of a property you own, you do not have to be living in it to raise a second charge mortgage.
Just as with any other loan raised against the security of property you own it remains at risk of repossession if you default on the repayments.
Why might I need a second charge loan?
Second charge loans are a way of unlocking some of the equity tied up in your property without the need to remortgage the property or to raise funds elsewhere – through a personal loan, for example.
So, it lets you avoid some of the potential pitfalls in remortgaging, such as:
- losing out on a currently favourable rate of interest on your current mortgage;
- if your credit rating has suffered adversely since you took out that first mortgage, remortgaging would mean you paying a higher rate of interest on the whole of your mortgage – rather than just on the funds you want to raise through a second charge loan;
- early repayment penalties on your first mortgage might make remortgaging prohibitively expensive compared to the cost of a second charge loan; and
- if you need the funds quickly, a second charge loan can typically be arranged faster than a remortgage.
Am I guaranteed to be accepted for a second charge loan?
No. Just as when you arranged your first mortgage, any lender needs to satisfy themselves about your creditworthiness and the affordability of any second loan.
That needs to take into account your earnings and outgoings – including the cost of your regular monthly mortgage repayments.
The lender will also need a valuation of the property and the value of the equity you own – since that is the security you are offering.
Just as with traditional mortgages, different second loan providers may have different lending criteria. For example, one may specialise in offering loans for people with a less than perfect credit history.
A specialist mortgage broker can help match your own unique financial needs and circumstances to the most suitable secured loan lender – ensuring it is cost-effective and appropriate for you.