How a Second Charge Mortgage Could Allow you to Borrow More While Still Using your Home as Security
A second charge mortgage can be a fantastic way to borrow more while using your property as security. However, there are risks that you need to be aware of and it may not be the best option for everyone. Our conveyancing solicitors are here to answer some common questions and help you decide whether a second charge mortgage is a good solution for you.
What is a Second Charge Mortgage?
A first charge refers to the first mortgage you take out on a property; therefore, a second charge is when you take out an additional loan while still using your home as security. The second charge mortgage is usually granted by a different lender, which allows you to enjoy the benefits both lenders offer without having to remortgage.
You do not have to live in the property you are using as security to be able to obtain a second charge; some landlords use their buy-to-let property as security instead.
How Much Could I Borrow With a Second Charge Mortgage?
The amount you can borrow will usually start at £1,000, which can increase up to £1 million depending on how much equity you have built up in your home (though your second charge will typically be much smaller than your first charge). Equity refers to the amount of your first mortgage that you have already paid off, which is used as security for the second loan; the more you have paid off of your first mortgage, the more you could be able to borrow through a second charge.
What are the Benefits of a Second Charge Mortgage?
With a second charge mortgage, you could
- Borrow if you’re self-employed and your lender will not let you borrow more
- Borrow if you can’t get an unsecured loan and/or have a less-than-perfect credit score
- Avoid early repayment fees incurred by remortgaging
- Keep the benefits of your current mortgage (such as lower interest) while still being able to borrow more
- Repay other debts which have higher interest rates, like unsecured loans
- Raise funds quickly for significant expenses, such as home renovation or a new car.
How Long Does it Take to Obtain a Second Charge Mortgage?
Usually, a second charge will be quicker to obtain than your first charge and if approved, you could receive the funds in as little as four weeks. The exact amount of time it will take can vary depending on individual circumstances.
Am I eligible for a Second Charge Mortgage?
You will of course need to have an outstanding mortgage on a property (not necessarily the one you live in) for a second charge, but lenders may also have their own specific criteria. Many lenders will require you to prove you can afford to repay both of your loans, plus have built up a certain amount of equity in your home before you will be approved for a second charge mortgage.
Speak to our sister company Starck Uberoi Wealth to find out which lender will offer you the best deals and what their requirements are. They can offer whole-of-market mortgage advice tailored to fit your needs and circumstances – call 020 8037 4027 or email info@suwealth.co.uk for an appointment.
Deed of Postponement and the Conveyancing Process
Some Mortgage contracts contain a clause which prevent the borrower from taking out a second charge on their property without consent from their original lender. You should always speak to your current lender first to avoid a potential breach of contract.
They may ask you to acquire a deed of postponement before they will approve a second charge. A deed of postponement is a legal document which states that your debt to your first lender takes priority over your second charge – this means that if you default on your mortgage and your home is repossessed, the funds from the sale of your home will first be used to pay back your mortgage lender, then any funds left over will be used to pay back your debt to your second charge lender.
Consequently, many second charge lenders require a valuation of the property that will be used as security before they will lend. If they do so, they may send solicitors of their own to investigate the property’s title. Our conveyancing solicitors can liaise with your lender’s solicitors on your behalf to answer enquiries regarding your property’s title, as well as help you obtain a deed of postponement if one is needed.
Will a Second Charge Mortgage have higher interest rates?
Your second charge will likely come with higher interest rates compared to your first charge due to the increased risk to your lender: as mentioned above, if you default on your loans then it is less likely that they will make back the money they are owed, as repaying your first charge is prioritised.
What Happens if I Don’t Pay Either of my Loans Back?
If you default on your mortgage, your home may be repossessed to repay your loans. If there isn’t enough to cover both charges, you could still have to repay what you owe. Furthermore, defaulting on two mortgages can have an enormous impact on your credit score and make it very difficult for you to obtain another mortgage in the future, so you need to be certain that you can afford to repay both loans before you make your application.
Is a Second Charge Mortgage Right for Me?
For those struggling to get an unsecured loan, a second charge mortgage can provide a boost to your finances while preventing you from paying high interest rates. It can be a fantastic idea if you have built up a large amount of equity in your home and if you can comfortably afford the repayments for both loans. Additionally, they can be a useful option for self-employed individuals or freelance workers who often struggle to borrow otherwise.
However, you should avoid a second charge if:
- You’re struggling to make repayments on your first mortgage: You could lose your home if you cannot make the repayments and there are far less risky ways to manage your debts which could be better for you.
- You want to move house soon: having to repay both loans could leave you with a very small deposit for your next property.
- Your credit score is incredibly poor: while a second charge can allow those with lower credit scores to borrow, if your credit score is too low then it is unlikely you’ll be able to get good rates on your second charge.
What Are my Other Options?
Remortgaging may be a better solution for you if you’re close to the end of your mortgage term. You can switch to an entirely new mortgage and pay off your first charge, so you can have a better deal and still only have one loan to repay.
Alternatively, an unsecured loan (like a personal loan or a credit card) won’t put your home at risk and can allow you to borrow funds on a short-term basis. This may be a better option if you’re looking for help making your mortgage repayments – however, be aware that unsecured loans typically have higher interest rates, meaning you could end up paying more in the long-run.
How Starck Uberoi Can Help
If you’re debating whether a second charge mortgage is right for you, we can provide bespoke independent legal advice. Time is often of the essence when applying for a second charge; consequently, we prioritise keeping a high turnaround rate without cutting corners and risking jeopardising the process with thoughtless mistakes.
Additionally, our sister company Starck Uberoi Wealth can help you determine the best course of acion for you. They provide comprehensive financial advice to determine whether a second charge is the best way you can borrow, what other options are available for you and how much you could borrow comfortably. Additionally, should you decide that remortgaging is better for you, Starck Uberoi Wealth’s whole-of-market financial advisors can navigate the mortgage market for you and find you a deal which fulfills all your requirements.
To book an appointment, call 020 8840 6640 or email solicitor@starckuberoi.co.uk. Our Brentford solicitors are a short walk from Brentford station, and our Ealing solicitors are close to Ealing Broadway and South Ealing. Our Belgravia solicitors are five minutes from Victoria, our Pinner solicitors are near Pinner Metropolitan line station, our Richmond solicitors are minutes from Richmond station, and our Canterbury solicitors are a short walk from Canterbury West. Our partner, Raminder Singh Uberoi, can also provide a Notary Public service at any of our offices.
Read More:
- Equity Release Mortgage Solicitors
- Bridging Loan Conveyancing
