Information about second charge mortgages

Our current financial climate has made it very difficult to borrow money. The banks are far less likely to lend finance without any collateral to secure it against which is why more and more people are opting for a second charge mortgage. This is a loan secured by a second charge behind your first charge, that being your primary mortgage.

What is a second charge mortgage?

This is a mortgage in which the debt is secured against collateral such as a house as a second charge behind the first charge mortgage. This collateral can then be taken by the lender should the debtor default on his repayments.

What can I use a second charge mortgage for?

Second charge mortgages can be used for most legal purposes. Due to the larger mortgage loan amounts and longer repayment terms available popular loan purposes can be home improvement, home extensions and debt consolidation.

Will I be eligible for a second charge mortgage if my credit rating is poor?

With a second charge mortgage, the lender is more likely to get the money back as if payments default, they can repossess the house. As a result of this, lenders are, on the whole, more likely to offer a second charge mortgage rather than an unsecured loan to a candidate with poor credit rating. 

Can I borrow a higher amount than I could with an unsecured loan?

Yes. Unsecured loans usually cap the borrowing at £25,000 but a second charge mortgage may be taken for up to a million pounds plus. Because the mortgage is secured, lenders also offer a longer repayment period, but similarly to personal loans, the longer the period the more overall interest you will pay, although the monthly payments will be less. A second charge mortgage may be borrowed for up to 25 – 30 years whereas a personal loan is usually repaid within 5 years.

Are the interest rates higher with a second charge mortgage?

They can be higher but in fact they are often lower than a personal loan because the loan is secured against an asset such as a home and therefore the lender is more likely to recoup their money via repossession. The length and amount of the second charge mortgage will also influence the rate, as well as the amount of equity in the home. Equity is the difference between the current value of the home and the remaining mortgage left to pay.

What are some of the disadvantages of a second charge mortgage?

The primary risk of a second charge mortgage is that as a last resort your house may be repossessed if you fail to keep up with repayments. Because of this, you must ensure you can afford the monthly repayments now and in the future. A further disadvantage is that you may incur early repayment charges and administrative costs if you want to pay off the loan early. 

Your Freedom Finance mortgage adviser will assess your attitude to risk, ensure that the product recommended is suitable and provide you with information about the costs related to your mortgage.