A second charge mortgage is a loan secured by your home. Just like your original mortgage, it uses your home as collateral but it falls in second lien position. Many people use this instead of remortgaging their home. Before you take out a second loan, you should know what to look for in it so you can decide if it’s right for you.
Getting a Second Charge Mortgage
The second charge mortgage works much like the first. You use your home as collateral. This time, however, you don’t have to make a cash deposit. When you bought the home, you had to put money down. This was your own investment in the home and was determined by your lender. The higher the cash deposit, the better the terms on your loan.
The second mortgage doesn’t need a cash deposit. Instead, you need equity in the home. The equity is like the cash equivalent. For example, if your home is worth 200,000 and you owe 100,000 on it, you have 50% equity in the home. In other words, if you were to sell the home, 100,000 of the money would be yours (minus necessary fees).
What do Lenders Need?
Most lenders will look at the same factors they looked at when you took out your first charge mortgage.
- They’ll need a certain multiplier of your income (4.5 is the average)
- They’ll look for proof that you can afford the loan
Keep in mind, it may be a little harder to qualify for the loan since you have to prove that you can afford both the first and second charge mortgage.
Finding the Right Second Charge Mortgage
Just like with your first charge mortgage, you’ll want to check out the details of your loan carefully. Find out the following information:
- What is the interest rate?
- Is there a promotional fixed-rate?
- How long is the term?
Second Charge vs Remortgaging
There are certain situations when a second charge is a better option than remortgaging. Typically, if you will face an Early Repayment Penalty, it makes more sense to take out a second loan. You’ll avoid the fee and have a second lien on your property.
If you aren’t in your first mortgage’s promotional period, though, you may want to compare your options. The interest rates on second mortgages are typically higher than the first because the second loan lenders take a higher risk of default. When you sell your property, the first loan lender gets paid first, then the second. If your home value drops too much, you may find yourself short to pay the second lender, which could cause them to bring a shortfall complaint against you.
Consult with a reputable mortgage advisor to discover your options and to find new lenders for your second charge mortgage. Make sure you know the rates, terms, and repayment charges before making a decision. Remember, your home is the collateral in these transactions.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY OTHER DEBT SECURED ON IT.