What is a second-charge mortgage?
A second-charge mortgage is a second loan on your home.
They’re also called secured loans or homeowner loans because the loan is secured by the equity you've built up in your property.
Second-charge mortgages allow you to make the most of the value in your home; however, this type of borrowing is a risk because if your circumstances change, you could be stuck with further debt or even risk losing your home.
Funding house renovations or large purchases like a car are some of the main reasons people take out a second-charge mortgage.
How do second-charge mortgages work?
Despite the name, a second-charge mortgage is treated separately from your existing mortgage, and you don't have to take out the loan with your existing mortgage lender.
Like a personal loan, you'll need to pay the borrowed sum back, plus interest, within a set period. However, with a second-charge mortgage, the equity in your property is used as collateral, which means that if you can't repay the loan, your house could be sold by the lender to settle your debt.
Second mortgage rates may be lower than other types of unsecured credit, such as a personal loan; however, there will be extra costs to pay, such as
- product fees
- valuation and legal fees
- administration charges
- broker fees
Can I get a second-charge mortgage?
Specialist lenders typically offer second-charge lending via mortgage brokers.
To qualify for a 2nd charge mortgage, you need to own a property and use your home as security for the loan. For most lenders, you'll also need to be:
- Over 21
- A resident in the UK
Be prepared to supply personal details so your lender can carry out identity, credit and affordability checks. You'll also need proof of your property's value and your mortgage details.
Can I get a second charge mortgage with bad credit?
If you have a mortgage and equity in your home, you could get a second-charge mortgage, even with bad credit.
In many cases, it could be easier than getting an unsecured personal loan because loan providers are less concerned about your credit history and affordability. That's because they'll use your house to pay back what you owe if you cannot repay the loan and agreed interest. Your chances of success will depend on the amount of risk the lender is prepared to take.
What's the difference between a second-charge loan and a mortgage?
A mortgage is a loan taken out to buy property or land. A second-change mortgage is a loan for any purpose secured against the equity you own in your house.
Second-charge mortgage rates are usually higher than your mortgage rates but are still lower than other types of unsecured credit, such as personal loans.
The ‘first charge’ lender (your mortgage lender) will always be paid before the second charge lender if you were unable to make repayments and your home were to be repossessed.
Remortgaging is an alternative to taking out a second-charge mortgage and can be a better option if you’re nearing the end of your fixed-term mortgage and want to release the equity in your home.
What are the pros and cons of second-charge mortgages?
A second charge mortgage on your property can be a useful way to maximise the value locked in your home and borrow at a low cost, but they're not the right choice for all homeowners.
Here's the pros and cons:
- You can borrow greater sums of money compared to an unsecured loan
- Rates are lower compared to unsecured lending rates
- You can repay the loan over an extended period
- It can be easier to get approval if you have bad credit
- It can be cheaper than remortgaging if you're on a low fixed rate
- If you can't settle the debt, your home is at risk
- A variable rate secured loan is unpredictable and costly if interest rates rise
- Over the total period, it may cost more than other loans due to the longer borrowing term
- Additional charges and fees on your loan may add extra costs
- Early repayment penalties may apply if you want to pay off your loan early
How do I apply for a second charge mortgage?
You can apply for a second-charge mortgage with a specialist direct lender or loan broker. You'll need to provide proof of your identity and supply several documents to demonstrate your suitability for lending.
The sort of documents you'll need to supply are:
- Evidence of identity, i.e. passport or driving licence
- Evidence of income and expenditure
- Mortgage statements
- Details of any outstanding debts and credit agreements
Your home will need to be valued by a chartered surveyor, and you'll have to cover the valuation cost.
Is a second-charge mortgage a good idea?
They won't be the best option for everyone, but a secured loan can make sense in certain circumstances, such as:
- Your current mortgage has a high early-repayment charge
- You are offered a second charge mortgage rate better than your remortgage rate
- Your credit rating has dropped, meaning remortgaging might be more expensive
- Your age means you can't secure a remortgage with your first mortgage lender.
The bottom line: Second-charge mortgages are a good choice if you’ve carefully considered your options and used a broker to ensure you get the best loan for your needs. However, your home is at risk if you default on the loan.
What are the alternatives to second-charge mortgages?
Remortgaging
A remortgage is when you take out a new mortgage deal with a new lender on a property you already own.
It’s a simple alternative to taking out a separate loan, but you'll need enough equity in your home to release the funds, and fees could be high. Bear in mind you’ll be extending your mortgage term, so you will end up paying interest on your mortgage for longer.
Home improvement loans
This type of credit is an unsecured loan designed specifically for home improvements. They’re similar to personal loans, but lenders may offer greater sums for longer or discounted interest rates for ‘green’ initiatives to help make your home more energy efficient.
You will need a good credit rating to get approval for this type of unsecured loan.
Personal loans
A personal loan is a standard loan from a bank, building society or lender. You won't need to provide collateral; however, good credit history and affordability are crucial for approval, so you'll need a decent credit score and a regular income.
If you want to borrow a large sum, this could be an expensive option with high monthly repayments.
Debt consolidation loans
If you've got multiple debts, a debt consolidation loan allows you to borrow funds to settle your debts, like credit cards or overdrafts, which you then pay back with one monthly payment.
This type of loan is ideal if you're looking for a large, affordable loan to cover existing debts, regain control over your finances and build your credit score.
Second-charge mortgage FAQs
It depends on the agreement terms, but there are often penalties for paying off a second-charge loan early, known as early repayment charges.
Think carefully about the terms of the loan when you make your application and look for a flexible arrangement if you think there's a possibility that you may wish to settle the loan early.
With secured lending, you can typically borrow between £10,000 and £500,000 if you have the equity in your home. It also depends on how much you can afford to repay each month.
Second-charge mortgage rates tend to be lower than unsecured loan rates, but the borrowing term is typically longer, so second-charge mortgages are not necessarily cheaper in the long term.
You may get a decision in principle very quickly, but the whole process could take around three weeks or more before you get money in your account.
You won't get credit instantly with a second charge mortgage because several checks need to happen when you have a second charge on property, such as property valuation, credit checks and legal searches.