Second Mortgages
Why take out a second mortgage?
Second mortgages are loans secured on your property from another source other than your lender. Many people use them as an alternative way to raise money, often for home improvements and debt consolidation, but there are somethings you need to be aware of before you apply.
There are several reasons why someone might take out a second mortgage:
If you are struggling with loan/credit card monthly payments, consolidating them into one affordable amount may be an option.
If you're struggling to get some form of secured borrowing - such as a personal loan, perhaps because you’re self-employed.
If your credit rating has worsened since taking out your first mortgage, remortgaging to a new mortgage to cover your house loan plus a further loan could mean you end up paying a higher interest rate on the whole new mortgage so you will pay more interest overall. Taking out a second mortgage means you would only be paying the higher rate and extra interest on the new amount you want to borrow.
If your current mortgage has a high early repayment charge, it might be cheaper for you to take out a second charge mortgage rather than to remortgage to release equity from your property.
The suitability of the examples above will depend on your personal circumstances. Provided you're up to date on your mortgage payments, it's worth considering a further advance from your existing lender on better terms - as it might be a better option.
Questions you may have…
How does getting a second mortgage work?
How much can I borrow on a second mortgage?
Can I get a second mortgage?
It's where a loan secured on the property is given from a source other than the original lender.
The second lender takes second priority to the first lender. This means if the property ever needs to be sold, the first lender will have first call on equity in the property.
As with any mortgage secured on your property, failing to repay it could mean you'll lose your property.
The maximum second mortgage you can get depends on the amount of equity you've built up in your home.
A second mortgage allows you to use any equity you have in your property as security against another loan.
It means you'll have two mortgages on your property.
Equity is the percentage of your property owned outright by you, which is the value of the home minus any mortgage(s) owed on it. The amount a lender will allow you to borrow will vary. However, up to 75% of the equity in your property will give you an idea.
Lenders have to comply with rules that cover affordable lending.
This means lenders have to carry out the same affordability checks and 'stress test' your ability to meet future mortgage payments as they would for an applicant for a main or first charge residential mortgage.
What if I move home?
When is a second mortgage not a good idea?
If you sell your home, you'll need to pay off your second charge mortgage. Or, if your lender allows it, transfer the second mortgage to a new property.
Although second mortgages can be useful, taking one out is a big step and the interest rates can be a lot higher than for first mortgages. So, you need to weigh up the pros and cons.
Some things to consider before taking out a second mortgage
Before you take out a second mortgage, check if you can get a further advance on your existing mortgage first and get advice from a suitably qualified adviser. They'll be able to help you find the loan best suited to your needs and financial situation.
They'll have to follow the rules set out by the Financial Conduct Authority (FCA) when dealing with you. These rules are designed to protect you.
If you choose not to get formal advice, you run the risk of taking out an unsuitable loan for your circumstances. If this happens, you might find it difficult to make a successful complaint.
