How Does The Second Charge On A Property Work?

A second charge, also known as a second mortgage, is a secured loan where the borrower uses their home as security. They are often utilised as a method to get money without needing to remortgage.

How does a second mortgage work?

You’re only eligible for a second charge if you’re a home owner, though you don’t need to live in the house. The loan can start at just £1,000, and failure to meet your repayments can result in repossession of your home.

A second charge is a second mortgage on your home, and uses any equity you have in your home as security against another loan. As an example, if your home is worth £250k, and you have £150k left to pay on the mortgage, it means you have £100k in equity. This means that £100k is the max you can borrow.

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Am I eligible for a second charge?

There are now stricter rules which lenders must abide by including:

mortgage advice
affordable lending
sealing with payment difficulties

The same checks are now carried on applications for second mortgages as they are on first mortgages, to ensure that the applicant’s financial situation is suitable to meet the repayments. This includes borrower’s needing to prove that they can afford to pay back the loan.

Why could a second mortgage be useful?

Here are some example situations of where a second mortgage could be useful:

if your current mortgage has a high early repayment charge, it could be cheaper to take out a second charge rather than remortgage
you may be finding it difficult to be accepted for an unsecured type of loan such as a personal one, this could be if you’re self-employed
since taking out your initial mortgage, your credit rating may have decreased meaning that remortgaging could result in you paying more interest in your whole mortgage. A second charge would instead cause extra interest on just the new amount you borrow

When is a second mortgage not for you?

A second mortgage isn’t a light step, it needs to be thoroughly considered. You must be sure that you can afford the repayments even if your circumstances change, otherwise you could lose your home. It’s not going to be the choice for you if you’re already only just being able to pay your first mortgage. If you’re looking to consolidate your debts, don’t use a second mortgage. These can continue for up to 25 years and if you’re using it to pay off smaller debts like credit cards, you could end up paying more interest in the long run. On top of this, you’d be using unsecured debt into secured debt increasing the risk of losing your home through repossession.

If you’ve decided to take out a second mortgage, get some professional advice first

A professional advisor will be able to help you choose the right loan for you. It’s best to speak to your current lender and ask them what the charge would be for an additional loan. Don’t just accept this though, do your research to find the best interest rates, and which loans offer the most suitable repayment charges and other mortgage terms for you.

Once you’re offered a loan from a lender, you usually have 7 days to decide if you want to accept. As long as the information you provided is correct, this offer is binding for this time period.

What are the alternatives?

If it’s just a small amount of money you need to borrow, an unsecured loan is likely better for you. Remortgaging or taking out an advance from your current lender may be best for you if you don’t have a large early repayment charge on your mortgage, and if you have some equity in your home and your situation hasn’t changed.