What is a second charge mortgage and how do they work?

Most homeowners have a mortgage, but you may be able to take out a second mortgage on your property to access extra cash.

So, a second-charge mortgage could help you to pay for home improvements or pay off debt. 

What is a second-charge mortgage?

A second-charge mortgage is a type of secured loan of more than £1,000 you can take out if you already have a mortgage on your property.

It can be used for all sorts of purchases, unlike your mortgage, which is the loan you use to buy your home. 

It isn’t a ‘top-up’ loan from your current lender but a new loan from a different one. 

While you must be a property owner to take out a second-charge mortgage, you don’t necessarily have to be living permanently in the property you’re securing the loan against.

So, you could use it for a buy-to-let or holiday home. 

How does a second-charge mortgage work?

When you apply for a second-charge mortgage, the lender runs an affordability check to ensure you can make the monthly payments on your current mortgage and the second one. 

They will look at your credit score and your income and outgoings.

They’ll also want to consider any debts you want to clear if you plan to use your second-charge mortgage to consolidate debt.  

What about rates and lenders? 

Second-charge mortgages tend to have higher interest rates than first mortgages.

It’s vital to consider this when deciding whether you can afford the payments.  

Second-charge mortgage rates can vary widely – between 2% and 20% interest – but it’s a good idea to aim for one between 2% and 7%. 

You are more likely to secure a competitive rate if you can prove that you can afford the loan and you have an excellent credit rating. 

To find a good lender who fits your plans, you’ll need to do some thorough research, as the exact rate you secure will depend on your circumstances.

You can use comparison websites or talk to a mortgage broker, who will be able to identify the best option for you. 

What happens if you have a second-charge mortgage and want to move?

There are two options if you decide to sell your home when you have a first and second-charge mortgage.

If your mortgages are ‘portable’, you can switch them to your new home and keep paying your current lenders. 

Alternatively, you could repay both loans when you sell your property and take out a single mortgage on your new house. 

Whether this option is feasible will depend on the conditions of both mortgages and any early repayment charges.

You should talk to a mortgage adviser about your options. 

The pros and cons of a second-charge mortgage 

A second-charge mortgage could be a good option if: 

• You want to keep your existing first mortgage. 
• You want to retain your existing mortgage, as switching will trigger an early repayment charge. 

• You’re hoping to raise money, but your credit rating has fallen since arranging your original mortgage, making some borrowing options expensive. With a second-charge mortgage, you will only pay the higher rate on the smaller amount you’re borrowing, not both mortgages. 

Some of the disadvantages include: 

• You’ll be paying two mortgages and risk losing your home if you can’t keep up with payments. 

• If you miss payments or are late with any, this may impact your credit rating and make it harder to borrow in the future. 
• If you’re aiming to use your second-charge mortgage to consolidate debt, you could end up paying more in interest overall than if you simply paid off the original credit card or loan.  
• You need to ensure you know the costs and fees before committing to a second mortgage. 
• Some second-charge mortgages have long repayment periods, so you could still be making payments in retirement. 

How do you apply for a second charge mortgage? 

The big-name lenders don’t always offer second-charge mortgages, so it would be wise to talk to a specialist mortgage broker about your options. 

When you’ve found a lender, you’ll need to provide three months of payslips, recent statements, plus your annual mortgage statement.

You’ll also need proof of your identity and address.  

Your first-charge mortgage lender must agree in writing before your second-charge provider can proceed; this is known as the deed of consent.

You also might need a valuation and conveyancing solicitor. 

A second-charge mortgage can be a cost-effective way to pay for home improvements, settle a major bill or consolidate debt 

But make sure you’re comfortable with handling two monthly repayments and that the term of your mortgage doesn’t compromise your long-term or retirement plans.