What Is A Second Charge Mortgage and How Do They Work?

With second charge mortgages becoming increasingly popular, it is important to understand what they are and how they can benefit you. A second charge mortgage is a loan secured against your property that runs alongside any existing mortgage you have.
They provide access to additional funding for homeowners who may not be eligible for other types of loans or credit products.
In this article, we’ll look at the benefits of second charge mortgages, how to apply for them, different types available, factors that affect eligibility and cost associated with them as well as alternatives and tips on getting the best rate possible.

What is a second charge mortgage?

A second charge mortgage is a type of loan secured against your property. The second charge is taken out after any existing mortgages and allows you to access additional funds from the equity in your home.

It’s important to note that second charge mortgages are separate from your standard mortgage, meaning that if you don’t keep up with repayments for both loans, your lender may repossess their respective security – either the property or other assets tied up in the loan agreement.

Second charge mortgages can help borrowers access more capital without having to move house or take on another primary residential mortgage.  They can be used for a variety of purposes, such as home improvements and debt consolidation.

How to get a second charge mortgage

The best way to get a second charge mortgage is to use a broker, as many 2^nd charge mortgage lenders don’t work directly with members of the public.

When choosing a second charge mortgage, always check for high broker fees, and avoid them where possible. There are several brokers who charge lower fees, such as ABC Finance or loans.co.uk.

The other key tip when looking for a 2^nd mortgage is to gather the required documents upfront. Before you apply, make sure you have all of the necessary documents. This may include proof of income, proof of employment, and proof of your current mortgage.

The advantages and disadvantages of second charge mortgages

There are several key advantages are disadvantages. The main ones are:

Advantages

• Lower interest rates: Second charge mortgages typically have lower interest rates than unsecured loans, such as personal loans or credit cards. This can make them a more affordable option for borrowing.
• Borrow larger sums: As collateral is being taken over your property, second charge mortgage rates are usually lower than those offered on personal loans.
• Can be used for any purpose: Unlike some types of loans, second charge mortgages can be used for any purpose, including home improvements, debt consolidation, or paying for a wedding or holiday.
• May improve credit score: If you make your second charge mortgage payments on time and in full, it can help improve your credit score. This can make it easier to qualify for other loans or credit in the future.

Disadvantages

• Higher interest rates: While second charge mortgage interest rates are typically lower than those for unsecured loans, they are usually higher than those for first charge mortgages.
• Fees: Second charge mortgages may come with fees, such as origination fees or closing costs, which can add to the overall cost of the loan.
• Risk of losing your home: If you are unable to make your second charge mortgage payments, you could risk losing your home to foreclosure. This is because a second charge mortgage is a second charge on your property, which means that if you default on the loan, the lender can foreclose on your home to recoup their losses.

What are the alternatives to second charge mortgages?

Alternatives to second charge mortgages include remortgaging, secured personal loans, and equity release.

• Remortgaging involves taking out a new mortgage against the same property with different loan terms or lower interest rates. It is often used to access funds for home improvements or consolidating debts. The costs associated with remortgaging typically include the mortgage application fee, valuation fees, legal fees, and exit fees.
• Secured personal loans are another option for accessing funds to cover expenses or consolidate debts. These loans are similar to second charge mortgages in that they are secured against your property, but they do not require you to switch lenders. However, these loans often have higher interest rates and fees compared to second charge mortgages.
• Equity release is another option for accessing funds from your home. This involves either taking out a lump sum or a lifetime mortgage, which is repaid when you sell the property or pass away. However, this type of financing does have some drawbacks, including high interest rates and the risk of losing your home if you fail to keep up with the payments.

As you can see, there are a variety of options available for accessing funds against your property. Whether you choose second charge mortgages, remortgaging, secured personal loans, or equity release depends on your financial situation and priorities.

To determine which option is best, always seek expert advice from an experienced professional.