Is a Second Charge Mortgage suitable for me
If you are looking to free up money whilst leaving your current mortgage in place, then a second charge mortgage – sometimes called a secured loan – could be a good option for you. This is a loan that is secured against your property and is available for many different purposes. It can allow you to avoid the costs associated with a remortgage.
What can I use a second charge mortgage for?
You can take out a second charge mortgage for all sorts of purposes. Some of the most common include;
- Home improvements
- Debt consolidation
- Business purposes (excluding start-ups)
- Deposits for additional property (Buy-to-let or holiday home)
- Payment of a tax bill
- Car purchase
- Lease extension
Whilst many people choose to use this service to raise money instead of remortgaging, the borrower needs to also understand that this is also paid off alongside your first mortgage.
Whilst second charges are usually higher rates than first charge, it could be cheaper to get a second charge rather than remortgaging, for example, if you have a very low rate mortgage and didn’t want to lose this by remortgaging, a second charge could save you money.
£150,000 mortgage over 25 years at 1% means total repayment of £169,593
Remortgaging to raise £130,000 at 2.5% over 25 years means a mortgage of £180,000 and total repayment of £242,253 or more simply an additional £42,660 total interest.
However, a £30,000 second charge at 5% over 25 years means total repayment of £52,614 add this to the current £169,593 totals £222,207 or £20,046 less total interest than the remortgaging option.
How does a second charge mortgage work?
A second charge mortgage is not quite the same as a traditional mortgage but instead, you are taking out a secured loan against the home you own. This means that you will have two loans, or two mortgages against the same property.
A traditional mortgage which you may more easily refer to as a first time mortgage or standard mortgage, is based on your credit rating, the size of the deposit, your income and ability to repay the debt each month, whilst a second charge mortgage is a loan based on the available equity in that same property.
You are still going to have to prove your income and ability to repay the second charge mortgage, but the amount a lender will loan you will be based on and secured against the equity in your home.
An example would be, if you brought a house for £200,000 and have £150,000 left to pay on the mortgage, then you would have £50,000 equity.
A second charge mortgage typically starts at £10,000, but the higher the equity in your home, the higher the amount you will be able to borrow based on your ability to repay each month.
Am I eligible to get a second charge mortgage?
You do not necessarily need a good credit score or even live in the property that you own, but you will need to be a homeowner.
As we discussed above, there are multiple reasons for taking out a second charge mortgage but you should weigh up your options, as a second mortgage can be a risky financial decision. If you have considered taking out a second mortgage, the first thing you should do is decide how much money you need, and what you will be spending it on. There may be an alternative such as opening a credit card for smaller amounts, as these can come without interest and 0% on purchases for a set period of time.
Similarly, personal loans could work out cheaper than a second charge mortgage, although you would need a very good credit rating for many of these options.
The main attraction for a second charge mortgage is that people who have a less than perfect or bad credit score can still be in with a chance of being approved.
Also, it might be easier to get a second charge mortgage, even if you have a fluctuating income, or are classed as self-employed.
What happens if I move home?
If you sell your home, the second charge mortgage would be settled as part of the new mortgage.
Speak to a specialist before making any decisions
We suggest speaking to a specialist before making any decisions as they can not only see if you are eligible, but how much you can borrow and offer additional suggestions which may be better suited for your situation.
Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.
If you are thinking of consolidating existing borrowing, you should be aware that if you are extending the term of the debt, you may be increasing the total amount you need to repay.
How Try Financial can help
We are able to assess and offer independent advice to see what services would suit your requirements best and have access to exclusive products nationwide. Get in touch with us on 01473 462288 or email us on firstname.lastname@example.org to see how we can help.