What is a Second Charge Mortgage and how can it help Property Investors?

Also known as a second charge loan, a second charge mortgage is used as security against the borrowers’ home and commonly used to raise money instead of re-mortgaging.

It allows you to use any equity you have in your home as security against another loan, meaning you will have two mortgages on your home.

Second charge mortgages are flexible and give the borrower the opportunity to access large amounts of money with terms to suit specific circumstances.

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What can a second charge mortgage be used for?

Second charge mortgages can be used for a number of different purposes such as home improvements, debt consolidation or purchasing a property.

They are also used in situations where a borrower is struggling to obtain unsecured borrowing, due to being self-employed or having poor credit.

Additionally, if your first charge mortgage has a high early repayment charge, it could work out cheaper to take out a second charge mortgage rather than to re-mortgage.

Many property investors use a second charge mortgage to borrow against an existing property to raise  the capital needed for a deposit on a BTL  property.  They would take a second charge out alongside a BTL Mortgage.

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When NOT to use a second charge mortgage

Second charge mortgages are a convenient product when used in the appropriate situation. Taking out a second charge mortgage is a big step and you should not get a second charge mortgage if you’re struggling to repay your current mortgage. Failing to make the repayments on your mortgage or second charge mortgage could result in you losing your home.

A reputable broker will advise you on whether a second charge mortgage is the right solution for you.

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Who can get a second charge mortgage?

You have to own a home to be eligible for a second charge mortgage as the property is used as security for the loan.

However, you do not necessarily need to live in the property. As long as you own a property with a sufficient amount of equity, you may be able to access a second charge mortgage. Like all finance solutions, the application is based on your personal circumstances.

Because lenders now have to comply with stricter rules, the borrowers have to undergo the same affordability checks for a second charge as they would for a first charge or main mortgage.

This means you’ll have to provide evidence that you can afford to pay back the second charge loan.

How much can be borrowed?

A second charge mortgage can be a loan of anything from £1,000 upwards. How much you can borrow is based on the equity you have in your property.

You will need to be able to pay the repayments on the first and second charge mortgage. If you sell your home, you will need to pay off your second charge mortgage or transfer it to a new mortgage. The first charge mortgage gets cleared in full before any money goes towards paying off the second charge, however, you are still responsible for paying off the remainder of the second charge.

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How long can you borrow for?

Most second charge mortgages are for 25 years, with some lenders offering longer terms. Like a normal mortgage, there is promotional fixed-rate or discount period, however, the interest rate is usually higher than a first mortgage.

Some lenders will charge an early repayment fee if you decide to pay off the mortgage earlier than the agreed duration.

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What are the costs associated with second charge mortgages?

When securing a second charge mortgage, most lenders will require you to pay valuation charges, legal costs or land registry fees and a broker fee.

There will also be interest on the second charge mortgage which varies from lender to lender.

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At Ramsay & White, we specialise in securing finance for first-time and experienced developers and investors.