There are numerous borrowing solutions for people who need to raise money – but the range of options can mean it’s challenging to find the right one for you.
- Debt consolidation.
- Buying an investment property abroad.
- Paying for private schooling and medical costs.
Are you a homeowner or a tenant?
There are numerous borrowing solutions for people who need to raise money – but the range of options can mean it’s challenging to find the right one for you.
A second-charge mortgage (also known as a second-charge loan) is one of the most popular loan options because it allows you to retain your current mortgage, while still borrowing money.
While these loans can be beneficial, it’s important to remember they use your property as security, so there’s a lot to consider before taking out a second mortgage.
In this guide, we’ll reveal everything you need to know about these loans, so you can decide whether it’s the right solution for you.
What is a second-charge mortgage?
The biggest consideration anyone will have to make when looking for extra cash is whether they want to remortgage their property or opt for a second charge mortgage.
Remortgaging is reconfiguring your current loan agreement, changing the terms and paying back the money over a longer period.
A second charge agreement is different because you take out a second loan while keeping your current mortgage deal in place.
However, if you choose the second mortgage, you’ll be paying two loans back and will need to keep up with the monthly repayments.
Why do people use second-charge mortgages?
Remortgaging and taking out a second-charge loan are both valid options – however, some people will choose second mortgages because the terms are more favourable than adjusting their current mortgage deal.
When you remortgage, your lender will look at your financial circumstances again, which can impact the terms you receive.
Here are some of the reasons for this happening:
Your credit rating has changed
All lenders look at credit scores before deciding whether an applicant is viable for a loan. When you choose to remortgage your property, your current lender (and new lenders) will evaluate your score and look for any changes.
If your credit rating has decreased since you initially took out the mortgage, you’ll probably find that the terms aren’t as good as before.
Taking out extra credit or missing a couple of payments can make a big difference to your repayments, but protecting your first mortgage by using a second-charge loan might mean you reduce your monthly repayments.
You’re already on an excellent deal
If a person is already on an excellent deal with low-interest rates, they might want to keep their agreement and avoid paying more.
Taking out a second charge mortgage can ensure you pay less and retain the terms of your original agreement.
Early repayment charges
Some mortgage providers expect people to make their mortgage payments over time and charge extra money when they want to pay the outstanding amount early. Switching to a new lender might also mean you pay back more – or incur a penalty for leaving your mortgage early.
A second charge loan can stop this from happening because you take out a different loan and protect your current mortgage.
The advantages of second-charge mortgages
There are plenty of benefits associated with a second-charge loan, which is why many people choose them when they need extra money. If you’re wondering whether this type of borrowing arrangement is right for you, here are the main advantages.
Borrow extra money
A second mortgage can help you get financing for home improvements, a new car or anything else you need money for. If you have a lot of equity in your property, you’ll be able to use that money and pay it back over time – instead of sacrificing your current mortgage.
Avoid a high early repayment charge
Some loan providers protect themselves by introducing early repayment charges to outstanding agreements. While some accept these fees, others use a second-charge loan to retain their current mortgage.
You can use a secured loan for many purposes
Second-charge mortgages aren’t just for home improvements; you can use them for different purposes. The most common uses are:
- Debt consolidation.
- Buying an investment property abroad.
- Paying for private schooling and medical costs.
Parents can also use their loans to help children get onto the property ladder, so there are plenty of benefits to securing additional funding.
These loans are relatively easy to secure
You can get a second-charge loan if you’re a homeowner with available equity. With so many brokers and providers across the UK, they’re one of the more accessible borrowing solutions, and people have many options.
How do second-charge loans work?
A second mortgage is only available to homeowners, as it’s a secured loan that requires equity as collateral. However, you don’t need to live in the property so that you can use an investment property or anything left to you as part of an estate.
When you take out a second mortgage, you’ll borrow against the equity in your property and not your existing mortgage.
You’ll only be able to borrow against what you already own, so the more equity you have in the property, the better your chances are.
For example, if your property is valued at £250,000 and you have an outstanding mortgage for £200,000, then you’ll only be able to borrow a maximum of £50,000 as this is the equity you own.
However, some lenders also cap the loan-to-value amount, so you might only be able to borrow between 80-90% of your current equity.
Paying back the loan
As you need to make monthly repayments on your mortgage and the second-charge loan, it’s essential to assess whether you can afford it. A second-charge loan is beneficial for raising some extra cash, but using your property as collateral means you must be aware of the risks.
If you can’t pay back the outstanding amount, your loan provider will have the right to repossess your property, impacting your credit score.
Things to consider before finding a second mortgage lender
As we’ve already mentioned, there are numerous benefits to getting a second-charge mortgage, but it’s not a decision you should enter into lightly. Here are the most important things you should consider before making an application.
Not keeping up with your mortgage repayments can cause huge issues and result in losing your property, but there are other disadvantages to these loans:
More responsibility
Your first mortgage is a loan secured against your property – as is a second-charge loan. Each month, you’ll have two mortgages to repay, which means more financial responsibility.
While many believe they cannot afford to pay two loans off, altering your lifestyle can significantly impact your financial state.
For example, minor changes such as getting a coffee at home instead of stopping on your way to work can save a lot of money.
Higher interest rates
As you already have one loan, the second-charge mortgage might have a higher interest rate. However, this also depends on your credit score because excellent ratings often mean more favourable terms.
Your circumstances could change
Thinking carefully before securing a second-charge loan is essential because your personal circumstances could change. For example, your financial viability might change if you’ve just started a new job or become self-employed.
Assessing how stable your current job and income are before making a decision could save you money and ensure you can afford the extra payments.
What are the alternatives to second-charge residential loans?
If you’re unsure whether a second mortgage is right for you, then some alternatives exist. However, it’s important to remember that these loans are usually the more stable option, as remortgaging, personal loans, and dipping into savings accounts are all risky options.
As we mentioned before, remortgaging your property often means you lose your current deal and the rates that come with it – but what about the other options?
Personal loans
Personal loans are unsecured, so you don’t need any collateral to access them. However, these loans depend on your credit score, and while they’re an alternative to remortgaging, they come with plenty of risks.
Lenders have limited security, so you’ll usually pay more. You can still lose your personal belongings and any valuable items should you fail to meet your repayments.
Using savings
Some people prefer to use their savings instead of securing a loan, and there’s nothing wrong with this.
However, a second-charge loan allows you to keep your current savings and pay back the loan each month, so they’re beneficial if you want to save that extra money as security.
Finding a second charge lender
Plenty of lenders are available, but you should find the right one for your needs. Instead of going straight to a mortgage provider, you can ask for support from a dedicated broker and get access to other lenders.
Believe Money is one of the UK’s most dedicated mortgage brokers, helping people from all walks of life to find a borrowing solution that suits their needs.
Get a free consultation
Our service is regulated by the Financial Conduct Authority, and we offer all potential clients a free zero-obligation consultation. We’ll learn more about your needs and current financial situation during the discussion.
Your financial advisor will also discuss your eligibility for a second-charge loan and tell you more about our solutions.
We search our database of lenders
We have a variety of lenders available for all circumstances, so you’re bound to find the right solution for your needs. Whether you’re struggling with poor credit or have defaulted on previous loans, we’ll go out of our way to help you.
As an award-winning second-charge mortgage company, we can help you make intelligent lending decisions, so you don’t have to worry about getting into more debt that you can’t handle.
Speak to our friendly customer service team
Once you find a mortgage lender, we’ll help you with the application, and then you can look forward to using the money for its chosen purpose. Better still, there are no upfront fees, so please contact us today and get the ball rolling on your future.
Why Use Believe Money?
Believe Money is an award-winning finance broker dedicated to offering the best range of affordable loan options. Whatever your circumstances or credit rating, we’re committed to getting you the best secured loan interest rates by searching our entire panel of secured loan providers.
Whatever you need a secured loan for, we’re here to help. Our specialist advisors are available Monday to Friday, so if you need any help please contact us online or give us a call on 01302 591 360.
How It works
Step 1.
Simple, easy application
Step 2.
We search our panel of lenders to find the deal that’s right for you
Step 3.
When you confirm your chosen deal, we get your application moving
Step 4.
The money lands in your bank
account – usually within two weeks
We compare loans from our panel of the UK’s top lenders to get you the best deal.
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