Should a second charge mortgage be your first choice?

With the current uncertainty in the UK’s political and economic landscape, and the potential for interest rate hikes on the horizon, more and more borrowers are looking to restructure their finances to give them greater certainty over their financial outgoings.

In doing so, it’s often a good idea to look at your primary mortgage as a means of restructuring your finances, consolidating debts or freeing up money. But for many borrowers, it makes more financial sense to leave their current mortgage alone due to a preferable interest rate, or to avoid early repayment charges, for example.

In cases like this, it might be worth looking into a ‘second charge’ mortgage. Also known as a secured loan or homeowner loan, a second charge mortgage uses your home as security in order to raise funds.

There are several reasons you might want to consider a second charge mortgage:

• If your credit rating has gone down since taking out your first mortgage, remortgaging could mean you end up paying more interest on your entire mortgage. A second mortgage means paying extra interest just on the new amount you want to borrow
• If your mortgage has an early repayment charge, it might be cheaper for you to take out a second charge mortgage rather than remortgaging
• If you’re struggling to get additional funds from your current mortgage lender, or if a new remortgage application has been declined
• If you’re struggling to get some form of unsecured borrowing, like a personal loan, perhaps because you’re self-employed or have bad credit history

Although second mortgages can be useful, taking one out is a big step and you need to weigh up the pros and cons.

Before you take out any mortgage, it’s a good idea to get advice from a suitably qualified advisor. To help you, we’ve teamed up with our partners at CMME, the UK’s leading mortgage specialist for contractors and self-employed workers.

Here, second charge mortgage expert Tammy Chalk shines a light on how these loans work and when they might be worth considering.

There are a number of reasons you might choose to apply for a second charge mortgage, such as:

• You can’t get additional funds from your current mortgage lender, or with a new mortgage lender via a remortgage
• Investing in a company start-up or injecting additional funds into your own business
• Paying a tax bill
• Debt consolidation
• Home improvements/extensions
• Helping with university fees or children’s tuition fees
• Helping a family member with a deposit for their first home
• Buy-to-let property purchase
• Lease extension

Before applying for any mortgage, it’s important to do your research - CMME can help with this. You must be at least 18 years old, as well as having an income (whether that’s from employment or self-employment).

A second charge mortgage could be an option if you’re not able to secure additional funds via re-mortgaging, but it’s best to exhaust that option first. It could be due to adverse credit, for example, trading accounts history or simply that your existing mortgage has early repayment charges that you want to avoid paying. In this scenario, a second charge mortgage could be a good way to secure a loan without the need to change or impact your existing mortgage – the two simply sit side by side.

A second mortgage might not be for you if you’re already only just managing to repay your primary mortgage as you could lose your home if you cannot keep up repayments on either mortgage.

Because a mortgage is a ‘secured’ loan, the amount you can borrow could, in theory, be much higher than that of an ‘unsecured’ loan, such as a bank loan.

But how much you can borrow depends on the existing equity in your home (in other words, the percentage of your property you own outright). You can calculate this by looking at the value of the mortgage owed on your property against the value of the home.

For example, if you bought a house for £300,000 and you have £250,000 left to pay on the mortgage, then you have £50,000 equity.* This equity combined with other factors such as income, financial status etc. will determine what you can borrow as a second charge mortgage.

In the majority of cases, homeowners that choose a second charge mortgage/secured loan as an alternative method of raising funds tend to borrow anything between £30,000 to £80,000.

Ultimately, the more equity you have in your property, the more money you’re likely to be able to borrow. (Remember that all cases are reviewed on a case-by-case basis.)

*this can change in response to changing property demands, especially if your property increases in value.

A second charge mortgage is simply another name for a homeowner loan. It’s a loan that’s secured against your property. So if you stop making your repayments, the lender has the right to repossess the property in order to get back what they owe. This is obviously the worst-case scenario, but it works in the same way as your main mortgage.

The interest rate payable on a second charge loan will be higher than your first charge or primary mortgage. So if you want to consolidate debts using a second charge mortgage to pay off smaller debts such as credit cards or small unsecured loans, this will mean you might end up paying more interest in the long-term.

But on the plus side, because the loan is secured against your home, it’s often possible to borrow more than you could with a personal loan. And in nearly all instances, you won't need to instruct a solicitor (unlike a remortgage application) which helps expedite the transaction – handy if you need the money in a hurry.

Second charge mortgage lenders usually lend for pretty much any legal purpose, so they are more flexible in terms of what you’re using the money for than a remortgage lender might be. And you can usually spread your repayments over a longer term than unsecured loans to make them more affordable.

Don’t forget that a second charge mortgage isn’t for everyone and you should fully explore the alternatives, like re-mortgaging or getting a further advance or personal loan.

It’s always best to speak with a specialist, such as CMME, before applying for any type of mortgage to make sure you fully understand the process and what’s involved. You should also make sure that the mortgage or loan you’re applying for is one that suits your circumstances and that you can afford it.

To find out more, speak to our partner CMME, specialists in self-employed mortgages.

The second charge loan application process is similar to applying for a remortgage in terms of information required. But unlike a standard remortgage lender, most second charge lenders only accept business through a registered broker, which means that some second charge deals will not be readily available on the high street.

Using a broker not only means you get the right advice from the outset but also means that you’ll get the most competitive and suitable option for your specific circumstances.

For more information, you can speak to our specialist mortgage broker CMME or call them direct on 01489 555 080. You can also read CMME’s guide to the right mortgage for you.

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

CMME is a trading name of CMME Mortgages and Protection Limited. Authorised and regulated by the Financial Conduct Authority (FCA reg. 414798). Registered in England No. 04886692. Registered Office: Albany House, 5 Omega Park, Alton, Hampshire, GU34 2QE. Please be aware that Commercial Mortgages, Overseas Mortgages and some Buy To Let Mortgages are not regulated by the Financial Conduct Authority. Calls may be recorded for training and security purposes and to improve the quality of our services.