What do you know about second charge mortgages?

Sunday, September 30th, 2018

There still appear to be widespread misconceptions about what a second charge mortgage is, who can have one and how they can be used.

A secured loan by another name.

In years gone by, this type of finance was known as a “secured loan”, but as the mortgage and finance markets have evolved in recent years its formal title of “second charge mortgage” is now more commonly used; mainly because that is exactly what it is.

Not just for debt consolidation.

A second charge mortgage is a loan which is separate from the main or “first mortgage” somebody has against their property and can be used for a variety of purposes.

Although there are many ways the capital raised from a second charge mortgage can be used, in our experience, those who raise capital in this way (using either their residential home or a buy to let investment property as security) most commonly do so for debt consolidation, home improvements, raising capital towards the purchase of a further property or perhaps to provide a deposit for their children to get onto the housing ladder.

Property owners only.

There is then the question of who can access a second charge mortgage. As the title suggests, this type of finance requires security in the form of a second charge against a property, so is only available to property owners. Furthermore, it can only be considered where there is already a mortgage against the property being used. If there is no existing mortgage, then security for the capital raised will take the form of a first charge on the property and the application itself will then be dealt with as a traditional mortgage and not a secured loan.

Why take a second charge mortgage?

So why would somebody would take a second charge mortgage instead of completely remortgaging a property, given the interest rates and fees on a second charge can often be higher than those for a remortgage? In our experience, the most popular reasons for that are:

• Their existing mortgage is on a very good rate which they do not wish to be disturbed/sacrificed.
• The applicant has a less than perfect credit history which could mean that the interest rate on the total borrowing (comprising of the existing mortgage and new advance) could be higher if a remortgage was attempted. Instead, it’s just the extra capital being borrowed on a second charge that may be affected in such a scenario.
• The money being borrowed is required for a purpose not acceptable to many mainstream mortgage lenders; such as business use, debt consolidation and property investment.
• The applicant may incur significant early repayment penalties if they were to move to a new lender and in doing so exit their existing mortgage too early.

In summary, there are many circumstances where raising capital via a second charge mortgage may be preferable to a remortgage or further advance and a professional mortgage broker with the knowledge of both markets will be able to provide impartial advice in all the circumstances.

If you would like to know more about how Caboodle Finance of Sutton Coldfield, Birmingham could help, please call our friendly team on 0121 308 9114 or alternatively, just click HERE to email us via the form on our website.

We will be delighted to help!