Criteria for eligibility
Your eligibility for a secured loan will be decided in the same way as for a first mortgage. This means that your lender will look at your income and type of job, your age, the type of property, and any history of bad credit. Before you apply, you should get copies of your credit reports to make sure there aren't any problems that could stop you from getting the money you need.
How your loan-to-value ratio (LTV) affects a second mortgage charge
Just like when you buy a house for the first time and need a down payment, most lenders won't want to lend out 100% of the value of the property because it's too risky. Instead, they will put a limit on your loan-to-value (LTV) ratio, which includes your current mortgage.
Let's say your home is worth £300,000 and you still owe £120,000 on your mortgage. Your current LTV would be 40%, and your equity would be £180,000. If a lender puts a 75% limit on how much you can borrow as a second charge, you could borrow up to £105,000 as a second charge mortgage. This means that the total amount you could borrow would be up to £225,000.
Within this, you would also have to meet the lender's affordability requirements, which would be based on your income and other financial obligations, such as your current mortgage. Lenders look at how much you can afford to make sure you can pay back your loan each month.
How to add a second mortgage to a house?
Even though getting a second charge mortgage is usually faster and easier than getting a first mortgage, there are some things to think about that are different, so it's best to do some research before you send in your mortgage application.
Talk to the company that owns your mortgage.
Before you do anything else, it's best to talk to your lender and make sure they're okay with you taking out a second charge on the property. Your current provider will need to agree to it, and it's not a given. They will have to give permission in writing, so make sure to give time for this as well.
Get your home appraised.
The amount you can borrow will depend on how much equity you have in your home. An up-to-date valuation is the only way to figure out how much equity you have. Once you know this number, you'll have a much better idea of how much of a loan you might be able to get.
Find a broker for a second charge
To get a second charge on your property, it's always a good idea to work with a mortgage broker. Second charge loans are specialised mortgages that aren't always offered by high street lenders. If you want to make sure you get the right product and the best rates, you'll need personalised, expert advice. If you fill out an online form right now, we can find the right broker for you.
Can a property with a second charge on it can be refinanced?
Remortgaging is possible in these situations, but the process is not always easy. You can expect to have a much smaller pool of lenders to choose from because many of them will see a second charge as a possible red flag. For example, they may be worried that you've had problems with debt and need to consolidate it. The type of lender you used for your second mortgage is also important. Some lenders are known for giving out mortgages to people with bad credit, which could be another red flag.
That doesn't mean it's impossible, though. You'll just need a broker who has experience with remortgaging with a second charge and can help you figure out the details. It's also important to remember that having a second charge will affect how much you can borrow because lenders will take into account how much debt you already have.
Can you get a new loan for a second mortgage?
Yes, you can refinance your second home loan just like you can refinance a standard home loan. This could be a good idea if interest rates have gone down a lot or if your situation has changed in a way that makes you more likely to get a better deal.
If you pay off your second mortgage early, you may have to pay fees, just like when you remortgage normally. You'll also have to think about other costs, like lender fees. If you want to learn more about this, you should talk to a broker.
Advantages and disadvantages
Getting a second mortgage is a big financial choice, and there are many pros and cons to think about. Whether or not you should get a secured loan depends on your personal situation, but make sure you've thought about the following:
What's good about a second mortgage?
- Instead of getting a new loan with a new rate when you remortgage, you can keep the rates you already have on your first loan. One of the main advantages of a secured loan over a remortgage is that mortgage rates are the highest they've been in a long time.
- There are no ERCs (early repayment charges) on your current mortgage.
- Unlike an unsecured loan, you can borrow more money and pay it back over a longer period of time.
- You can keep the same length of time on your mortgage as it was before.
- If you choose a product that doesn't charge you if you pay it off early, you might be able to pay off the debt faster and save money on interest.
The bad things about a second mortgage?
- You will need to get permission from the lender you already have. Cross Interest rates will be higher than normal mortgage rates.
- You'll have to make two mortgage payments every month, which will affect your regular finances and put your home at risk if you don't keep up.
- There may be fees to add as extra costs, such as fees from the lender, the application, and the broker.
- If you leave yourself with little equity in your home, you run the risk that house prices will go down or that you won't have much money for a down payment on another home if you decide to sell.
Is there are other options to a second mortgage?
Before you sign up for a second mortgage, you should think about whether one of the other options might be a better fit for you. A broker can give you advice and help you figure out what the best choice is.
- Remortgaging: Having all your mortgage debt in one place can be helpful if you don't have to pay ERCs and can get a competitive rate.
- Further advance on existing loan: If you've been responsible with your current mortgage and your finances are good, your current lender may be willing to let you borrow more on your current mortgage under the same terms.
- Unsecured personal loan: This type of loan is good for smaller amounts and can be set up much faster than a secured loan because there is no need for a second charge. Most personal loans can't go over £25,000. However, if you borrow from your own bank, you may be able to borrow up to £50,000.
How much interest to expect?
At the time this article was written (October 22), the average rates for a secured loan of £50,000 for 15 years ranged from 5.7% variable to 6.1% fixed for 5 years.
Most of the time, the interest rates on second mortgages are higher than those on first mortgages. This is because a second charge is riskier for lenders. If you can't make your payments and your house is taken away, they won't be the first ones to get paid back.
The exact rate you get will depend on a number of things, such as how much equity you have in your home compared to the loan amount and how much you still owe on your first mortgage. You can find the best rates for your situation if you work with a broker who specialises in second mortgages.
Who offers second charge loans?
Most of the time, you can't go to the same people for a standard first mortgage and a second charge mortgage. Some high street banks do offer secured loans, but they are often only available to customers who already have an account with the bank, and the rates aren't always the best. Most of the time, you should look at more specialised lenders who are willing to take on a bit more risk.
Your broker may already have relationships with these lenders and be able to get you the best rates. Some may only work with brokers or have rates that are only available through brokers. Examples include:
- Pepper Money offers secured loans from £10,000 to £1,000,000 that can be paid back over 3–30 years. You can pay more than you owe without being charged extra, so you can pay off your debt early if you can.
- Step One Finance will consider loans from £10,000 to £200,000 for 6-30 years. You can borrow up to 95% of the value of your home, which includes the amount of your first mortgage.
- West One Loans offers loans of up to £500,000, with a maximum LTV of 80% and a loan term of 3–30 years. Loans are available to people who are employed, self-employed, or retired, as long as the loan term ends before they turn 85.
Are there rules about second mortgages?
Yes since 2016 a second charge loan is governed by the FCA in the same way that a first charge loan is.
How long does it take to set up a second mortgage?
The process of getting a second mortgage is much faster than getting your first mortgage, so you won't have to wait months. Some lenders say they can process secured loans in a few days, but you should really give them 3–4 weeks.
How can I get rid of a second charge loan on my property?
Once you've paid off the debt in full, your lender should notify Land Registry automatically, and the charge will be removed. If you have a problem with a paid-off loan that hasn't been removed, you can contact the Land Registry directly. They will look into it and contact the lender on your behalf.
Can I put a second charge mortgage on a home I bought with Help to Buy?
If you used the Help to Buy equity loan programme to buy your home, you already have a second charge on it because you have a mortgage and a separate government loan. There are lenders who will accept a third charge, and your broker will be able to find them for you.
Can I sell my home if there is a second charge loan on it?
Yes, you can, but when you do, you'll have to pay off the loan. Sometimes a lender will let you move the second charge to a new property. If this is something you want to do, talk to your broker.
For a second charge mortgage, do I need a lawyer?
No, you don't need legal help for a second charge mortgage, but you should talk to an expert before deciding if it's the right choice for you. A mortgage broker who specialises in second charge mortgages is the best person to talk to.
