Guide to second charge mortgages (secured loans)

A second-charge mortgage is a mortgage secured against your property in addition to your current mortgage(s). You may also know a second charge mortgage as a secured loan or second mortgage. They’re exactly the same thing.

Your home serves as security for the second mortgage, as it does for your first mortgage. Therefore, you cannot exceed 100% of your property value with the combined value of both mortgages (100% LTV).

In many instances, a second charge lender will allow you to borrow up to 100% LTV minus the balance on your existing mortgage(s). So, if your property is worth £250,000 and your mortgage balance is £150,000, you could be able to borrow a further £100,000. This would take you up to “100% LTV”.

Some lenders, however, limit the total combined loan value to 95% LTV. Our brokers can advise exactly how much you can borrow once they receive your enquiry details.

There’s more to taking out a second charge mortgage than that. This guide will help you understand the ins and outs in crystal clear English.

Please read this guide in full, as it contains frequent comparisons to remortgaging as an alternative option.

Once you’ve weighed up your options, our brokers are on hand to help with any further questions. And, as second charge mortgages really are unique to each borrower, we’re sure you’ll have some.

What can I use a second charge mortgage for?

Second charge mortgages offer you more scope than personal loans. Your options are broad: everything from paying school fees to propping up a business deal. But, from our experience, our clients have four main uses for them:

Debt consolidation

There’s nothing inherently wrong with using a personal loan to combine your unsecured debts. It will still help organise your finances and give you one manageable monthly payment. But…

…you can do exactly the same thing with a second charge mortgage, often with a lower interest rate.

Firstly, you can potentially borrow much more, depending on your equity. Plus, interest rates on second charge mortgages are likely to be significantly lower than those on a personal loan. If you have the equity in your home, a second charge mortgage can cost you less in monthly payments.

Home improvements

Taking out a secured loan for home improvements is a smart move. You’re releasing equity from your home. But, as well as making your home life more comfortable, you’re also ploughing that capital back into it. Win-win!

The scope of home improvements you can use the money for is vast; these are the top five:

• Loft and garage conversions
• Home extensions and/or conservatories
• Kitchen remodelling/refurbishments
• Bathroom installations/upgrades
• Energy efficiency upgrades and major repairs

You can also use the capital for landscaping your garden, or even just to buy a new shed!

Property investment

Taxes and reductions in relief have restricted the benefits of renting out a property in recent years. That said, many contractors still see the value in buy-to-let.

Owning and renting property can be a valuable financial tool. You can use rental income to supplement your income today. Alternatively, you can add an additional layer to your pension for future use.

Releasing the equity in your home can provide the deposit you need to buy a rental property. Again, you’re reinvesting that money in bricks and mortar. If history teaches us anything, that’s a sound move.

Paying a tax bill

Consolidating unsecured debt with a personal loan has its limitations. Most lenders won’t forward you a loan if your intention is to use the capital to pay a tax bill.

You have no such restrictions with second charge mortgages. Many independent contractors and business owners will face an unexpected tax bill in their lifetime. Often, they also come with short periods of notice during which the debtor must pay.

Lenders won’t bat an eyelid if paying a tax bill is what you want to use a second charge mortgage for. They’re also much quicker to process than a remortgage. So, you can get HMRC off your back in no time if you have the equity in your home.

The financial implications of second charge mortgages

When you take out a second charge mortgage, you should always consider the terms of your first mortgage. Whilst they’re separate loans, you shouldn’t judge them in isolation.

To that end, here are some factors you might want to consider:

Early repayment charges

If you’re still within your first mortgage’s introductory term, you will face ERCs should you pay it off or remortgage. One of the advantages of a second charge mortgage is that it leaves your current mortgage intact.

Leaving your first mortgage intact means you won’t face those ERCs. It also means that, if you’re on a particularly low interest rate, you protect that, too.

If your introductory term has ended, or is coming to an end, you may want to consider a remortgage instead. That’s because the interest rates on second charge mortgages are nearly always higher than on your first mortgage, further loan advance or a remortgage. Also, the ERCs are much lower the closer you are to the end of your introductory term.

It may mean getting out the calculator to work out which option saves you the most in the long term. But our brokers can help you with that. It’s also worth remembering that a full remortgage will take longer to process than a second charge mortgage.

Fees and charges

As well as costs associated with your current mortgage, there are fees for arranging a second charge mortgage. Here are the most common fees, in no particular order:

Lender fees:

Your new lender may charge fees for arranging, processing, and administering the loan, as well as booking fees.

Valuation fees:

Your new lender has to ensure that your property covers the mortgage amount, especially if you’re borrowing up to 100% LTV. They’ll charge a valuation fee to cover these costs.

Broker fees:

A broker will charge a fee for sourcing the mortgage and processing the application. This can either be a flat fee or a percentage of the mortgage amount.

Your credit rating

Another factor to consider when choosing between a remortgage and a second charge mortgage is your credit rating. And your credit score affects every decision a lender eventually makes.

How much you can borrow

Overall, lending criteria are less stringent for second charge mortgages than they are for first charge mortgages. This will impact both the LTV and LTI available to you. And, as stated earlier, lenders limit your borrowing to 100% LTV, at most.

LTV – Loan to Value

The most you can typically borrow for a first charge mortgage is 95% of the property value (95% LTV). With a second charge, you can borrow up to 100% LTV (minus your current mortgage balance). Lenders reserve the right to cap that ceiling at a lower percentage at their discretion depending on your credit score and earnings.

LTI – Loan to Income

If you have a good credit score, lenders will typically assess your affordability as 5 to 6 times your gross salary/income. With a second charge mortgage, they could offer six times your annual earnings. Whatever the multiplier, the amount you can borrow is capped at 100% of your property value.

Consent from the first mortgage lender – It’s a secured debt

A second charge mortgage is a loan that’s secured on a property which already has a first mortgage. Because the first lender has the main claim on the property, they have to agree before a second charge can be added. This agreement is made through a Deed of Postponement, which sets out the order in which the two lenders will be repaid if the property is sold.

If you fail to keep up your repayments, lenders will take steps to repossess your home. Your first mortgage provider will have first dibs on any money recouped by the sale of your property. The second charge provider will hope there’s enough left over to repay what you owe them.

Mortgage management

A second charge mortgage is a separate loan from a different provider. That means you’ll have two separate payments going out each month. The interest rates will also be different.

It’s up to you to manage those repayments each month. But with a remortgage, you’d pay one interest rate and have only one monthly payment. This is something else to consider if remortgaging is an option.

At-a-glance: the pros and cons of second charge mortgages

Here’s a recap of the up- and downsides of second charge mortgages:

Pros:

The benefits of a second charge mortgage are:

• Consolidate your unsecured debts into one manageable monthly payment
• Interest rates are generally much lower than rates for personal loans
• Release up to 100% of the equity in your home
• Borrow up to six times your annual income
• Ringfence your current mortgage rates and your mortgage term
• They’re much quicker to arrange than a remortgage

Cons:

And here are the downsides:

• By focusing solely on a secured loan, you may miss good remortgage deals
• You’ll have two separate mortgage payments per month to two different lenders
• Every second charge mortgage comes with its own fees and charges
• The second charge interest rate will be higher than your first charge (usually)
• It’s a secured debt; if you fail to keep up repayments, lenders may repossess your home

Why use Freelancer Financials

We are a 100% independent, family-owned mortgage broker. That means we can approach any relevant lender with your mortgage enquiry. Many other brokers out there offer second charge mortgages as a third-party service only. Not us: we go straight to the horse’s mouth.

Since 2004, we’ve won multiple awards and secured over 30,000 mortgages, many with complex scenarios. That’s because of our expertise in working with both specialist lenders and mainstream lenders.

Many of our brokers have been with us from the start. We’ve built strong connections with underwriting teams and are in constant contact with them. This means we have our finger constantly on the pulse of the market.

We are the first and only broker to publish lending criteria for the flexible workforce from over 30 lenders. Being confident in our service and staying up-to-date with the market allows us to offer this service.

Every customer has their own portal, tied into our state-of-the-art software. At any time, you can log in to see your mortgage’s progress, as well as store your digital documents all in one place.

And, we’re a family. That includes our customers. We pride ourselves on being with our customers for the journey, not just a one-off deal. That’s why every customer has a dedicated manager and admin team from the start.

Getting to know your long-term goals helps us recommend the right mortgage for you now and for your future. Whatever you need a second charge mortgage for, we’re positioned to bring it home. Call us now or request a callback for a free, confidential chat. If you’ve got the security, we can get you that loan.