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Second Charge Mortgages

Secured Interest-Only Home Loans

Secured home loans are a viable alternative to a conventional mortgage and beneficial in multiple scenarios. Here we look at whether a secured loan can be structured with interest-only payments and what sort of providers you'd need to apply to.

What Are Secured Home Loans?

Revolution Brokers often receive enquiries about interest-only secured home loans - as a second charge mortgage, as an alternative form of lending, or as a more flexible borrowing method.

Here we'll explain how interest-only second charge mortgage home loans work, what the criteria are, and how they differ from a standard mortgage.

If you'd like help comparing interest-only borrowing rates or finding an interest-only second charge mortgage lender who will offer you competitive terms, contact the Revolution team on 0330 304 3040 or email us at [email protected].

What is the Difference Between a Secured Interest-Only Second Charge Mortgage and an Unsecured Home Loan?

Secured loans mean:

  • The lending is secured against an asset - such as a property.
  • If the loan is not repaid, the interest-only second charge mortgage lender repossesses the asset lender to recoup the debt.
  • On an interest-only secured loan, the typical security is your home.
  • Secured home loans are a way for homeowners who already have a mortgage to take out additional borrowing.

If you have a mortgage and a secured loan, this is sometimes called an interest-only second charge mortgage, as it is also secured against your home, with the first-charge mortgage having priority in a repossession scenario.

Unsecured loans, on the other hand:

  • Are not secured against an asset, so the lender has no security.
  • Typical unsecured loans are credit cards, overdrafts or personal loans.
  • The criteria are often stricter, and the interest rates higher to reflect the increased risk level.
About Your Mortgage
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Based On Your Yearly Income, You May Be Able To Borrow

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Most lenders will let you borrow 4.5 times your annual salary so, as long as you have a standard 10% deposit, you should be able to borrow this much.

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Depending on your personal circumstances, some lenders may let you borrow 5 times your salary.

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Lenders usually cap the amount they lend at 5.5 times your salary, so it’s unlikely you’ll be able to borrow more than this.

What are the Advantages of an Interest-Only Second Charge Mortgage Loan?

  1. Lower Costs. On an interest-only second charge mortgage, you only pay the interest, without repaying any of the capital. That means that your monthly costs will be lower.
  2. Better Interest Rates. As the lending is secured against your property, the interest rates offered will be lower than for unsecured borrowing.
  3. Flexible Terms. Most unsecured loans can be up to seven years, but a home loan can run up to 15 years, or even up to 25 years depending on the circumstances and the lender.
  4. Credit History Growth. Given the low-risk level accepted by the lender, the terms are usually much more flexible. If you're looking for an extended payment term, you can gradually improve your credit rating by ensuring you keep up to date with the interest payments.

Are There Disadvantages to a Secured Home Loan or an Interest-Only Second Charge Mortgage?

The big downside of an interest-only second charge mortgage is that you are only paying the interest each month, so you need to have an exit strategy to demonstrate to your lender that you will be able to repay the full capital sum borrowed at the end of the term.

We'll explore the most suitable repayment vehicles later, but if you reach the end of the loan period and your exit strategy falls through, you may need to move quickly to find a way to repay or refinance the debt.

In Which Situations is an Interest-Only Second Charge Mortgage Loan the Best Option?

Most of the time, a secured interest-only second charge mortgage loan is used for property extensions or conversions. This borrowing releases equity held and is repaid on an interest-only basis.

Another popular reason is to consolidate debts. A secured loan is likely to carry lower interest rates and give you a much more extended period to control your budget and pay back the borrowing.

Other reasons include raising funds for personal reasons or to finance an investment.

Interest-Only Second Charge Mortgage Loan Affordability Considerations

Lenders will need to assess your income, to be confident that you can afford the monthly payments.

The below shows an example of how the payments would look on a personal loan, as compared to an interest-only secured loan:

Personal Loan Term

Monthly cost

Total Payable

Three years

£448.32

£16,157.32

Five years

£282.31

£16,938.36

Seven years

£211.23

£17,743.05

 

Interest-Only Secured Loan

Monthly cost

Total Payable

Ten years

£36.99

£19,439.29

15-years

£36.99

£21,658.93

25-years

£36.99

£26,098.21

This illustrates how an interest-only secured loan can significantly reduce your monthly outgoings.

However, the total repayable is much higher, since the monthly payments do not include any element of the original amount borrowed.

Is There a Maximum I Can Borrow on an Interest-Only Second Charge Mortgage?

The value you can borrow on an interest-only second charge mortgage depends on how much equity you own in your property, and what Loan to Value ratio the lender offers.

Many lenders set a minimum equity threshold - this can be anywhere from £100,000 upwards, and some providers do not require a minimum at all.

For example, if you own a property worth £200,000 and have an existing mortgage of £100,000, you have £100,000 of equity - this might dictate which lenders are best to apply to.

The Loan to Value ratio also comes into play - this indicates the maximum a lender will offer, against the value of your property.

Say a lender has a 60% maximum LTV for secured interest-only loans. If you have a property worth £200,000 and owe £70,000 on a mortgage, they can offer a secured loan up to £50,000.

In some cases, you can achieve a higher Loan to Value. It varies across the market, with Loan to Value caps ranging from 50% up to 85%.

Is an Interest-Only Second Charge Mortgage Better than a Remortgage?

The right lending depends on what you need the capital for and your circumstances.

In some cases, a remortgage isn't possible or isn't attractive. For example:

  • Your existing mortgage offers excellent interest rates that are not available on a remortgage.
  • You are tied into a fixed period and would have to pay early repayment fees to remortgage.
  • Your lender cannot offer a remortgage due to issues with your credit, or if your financial circumstances have changed.
  • You want to blend lending types, by avoiding two simultaneous repayment loans, or by retaining your existing mortgage and using interest-only lending to raise the additional funds needed.

For independent advice about comparing interest-only second charge mortgage options, or the most suitable lending options for your requirements, give us a call on 0330 304 3040.

How Do the Affordability Criteria Work on Secured Home Loans and Interest-Only Second Charge Mortgages?

Each interest-only second charge mortgage lender will have its own policy, but the general affordability criteria look at your credit file, and your income to ensure you can afford the debt.

This interest-only second charge mortgage assessment process considers a wide range of income and expenditure, such as:

  • Salary and employment income.
  • Bonuses, commissions and overtime.
  • Part-time employment pay.
  • Self-employed pay, including dividends.
  • Pension funds.
  • Variable income from contracts or temporary work.
  • Investment returns.
  • Maintenance costs.
  • Government benefits in some situations.

What Happens at the End of my Secured Interest-Only Second Charge Mortgage?

When you reach the end of the term, you need to pay back the original loan value. This will be via the repayment strategy presented to your interest-only second charge mortgage lender at the time of application.

Common repayment strategies for an interest-only second charge mortgage include:

  • Cashing in savings or an ISA.
  • Selling another portfolio property.
  • Selling investments, such as stock, shares, unit trusts or bonds.
  • Selling the property.
  • Tax-free pension withdrawals.
  • Using an endowment policy - although reasonably unusual.
  • Using an inheritance.

If you have a problem with your exit strategy for an interest-only second charge mortgage, there are a few options available:

  • Raising cash to repay the debt.
  • Remortgaging - either with your existing lender or a new provider.
  • Remortgaging to a repayment mortgage.
  • Selling the property.
  • Using an equity release product if approaching, or past retirement age.

In some cases, you might have reached retirement age during the loan term and find it difficult to remortgage if you are over the age cap set by some interest-only second charge mortgage lenders (usually up to 70 or 75, and sometimes as high as 85).

Some specialist interest-only second charge mortgage lenders have no age caps at all, and there are equity release products designed to applicants over 55.

If you find yourself in this scenario, contact mortgage brokers, and we will run through the options with you.

What is the Worst-Case Scenario if I Can't Repay a Secured Interest-Only Second Charge Mortgage?

The worst-case scenario is that you cannot repay the debt, cannot refinance, and cannot sell the property.

In this case, the interest-only second charge mortgage lender could repossess the property and sell it to recoup the debt.

However, repossession is a last resort, and something an interest-only second charge mortgage lender will actively avoid in favour of other solutions.

Can I Get an Interest-Only Second Charge Mortgage if I Have Bad Credit?

Potentially, yes, and secured loans are more flexible than mortgages so that interest-only second charge mortgage lenders can offer a little more leeway.

Specialist bad credit interest-only second charge mortgage lenders can consider applications even when the following appear on your credit history:

  • Late payments or defaults.
  • CCJs.
  • Mortgage arrears.
  • IVAs or DMPs.
  • Bankruptcy or repossession history.

The first step to applying for an interest-only second charge mortgage with bad credit is to request a copy of your credit file, to examine the information, see how your score looks, and query any errors or inconsistencies.

Contact Revolution for bespoke advice about lending options in a bad credit situation.

Professional Advice For UK Secured Interest-Only Second Charge Mortgage Home Loans

Whether you're looking for a second mortgage, want to explore interest-only borrowing options, or would like to understand what lending you might be eligible for, contact the Revolution Brokers team.

As an independent, whole-of-market broker, we recommend any product from any interest-only second charge mortgage lender that we think is best for you, as well as leveraging our experience to negotiate rates and terms on your behalf.

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