How Does a Second Charge Mortgage Work in Terms of Maximum Borrowing Values?
As we've mentioned, most second charge mortgage lenders will offer up to an 85% LTV. The LTV is the Loan to Value, or the amount of borrowing secured against the total value of the property.
For example, if your home were worth £100,000, an 85% LTV would be £85,000. However, second charge mortgage LTV calculations are based on the equity owned, i.e. the difference between the value and the debt already owed on your first charge mortgage, not the market value of the property were it offered for sale.
Most 2nd charge mortgage UK lenders will offer 85% as an upper threshold. Still, some have a lower limit of 80% in order to offset the potential risk that you will borrow more than you can repay or that they would not be able to recoup the full debt should they end up in a second charge mortgage repossession scenario.
A second charge mortgage applicant with £150,000 of equity, having accounted for their first mortgage, and with an LTV of up to 80% would therefore be able to borrow up to £120,000 as a maximum.
It is also important to clarify that equity is only one part of the second charge mortgage lending criteria, and only applicants who satisfy every other assessment and have a good credit score will be able to borrow up to the upper threshold.
What Can You Use a 2nd Charge Mortgage UK For?
Before a lender considers the second charge mortgage LTV they wish to offer, they will often ask for some information about the purpose of the loan. Although there aren’t usually specific limitations, a lender will typically want to understand a little about the reason for the application.
Some of the many reasons people choose to take out a second charge mortgage include:
- To finance home improvements, such as using a second charge mortgage for extension funding.
- To purchase another property, including a buy-to-let or holiday home.
- To raise financing against their equity to help a family member or relative buy a property.
- To cover other outgoings such as education, vehicle purchase, holiday or medical costs.
Most lenders will offer a similar second charge mortgage LTV regardless of the purpose, but may, for example, need to investigate further if you wish to use a second charge mortgage for debt consolidation to ensure there aren’t any issues around affordability or your debt-to-income ratio.
Average Requirements Within Second Charge Mortgage Lending Criteria
Your choice of lender will influence the eligibility criteria applied. The basic premise is that you must have sufficient equity in your home to cover the second charge mortgage borrowing and be able to borrow the required value within the standard LTV limit.
Some lenders will also have different policies, such as a minimum value they will lend, and all will need to verify that you are legally resident in the UK to comply with statutory checks.
Aside from your equity and the second charge mortgage LTV, you will also need to pass affordability assessments, where the lender calculates the proportion of your income that you will need to keep pace with the repayments, as well as paying all other debts alongside your first charge mortgage.
Further, second charge mortgage lending criteria will require a credit check, where adverse credit and any more serious credit issues may mean you find it more difficult to find second charge borrowing due to the perceived lender’s risk of a second charge mortgage repossession.
Repossession is relevant since, as a second charge lender, the new financing provider would be treated as a second repayment priority in preference of a first charge lender. Therefore, they need to be comfortable that there is little chance of you defaulting, since this affects their ability to recoup the unpaid debt.
Pros and Cons of Applying for a 2nd Charge Mortgage UK
Of course, the advantages of a second charge mortgage 95% LTV product may be more attractive if you qualify for higher amounts of borrowing against your equity – but it is more likely you’ll find your second charge mortgage LTV capped, as we have explained.
Among the benefits, a 2nd charge mortgage UK offers:
- The potential to borrow a greater value against your home without extending your current mortgage if you can find better interest rates or borrowing terms elsewhere.
- Options to secure a 2nd charge mortgage UK with flexible repayment terms, without needing to remortgage.
- Extra borrowing, within the second charge mortgage LTV, while avoiding an early repayment charge if you are still within a fixed period with your first charge mortgage lender.
There are also drawbacks because second charge mortgage lending criteria are heavily dependent on your equity, you are at risk of losing your property if you do not keep up the repayments, and you will need to cover all the costs of mortgage fees, potentially with additional property valuations and product charges, while still needing to repay your original mortgage.
The right options depend on why you wish to apply, what you would like to do with your second charge mortgage lending, and whether you have enough equity to borrow your desired value within the second charge mortgage lending criteria.
For more information about the maximum you can borrow and how this is calculated, please get in touch with the independent experts at Revolution Finance Brokers.
