Navigating the mortgage landscape with adverse credit can be challenging. However, a second charge mortgage offers a potential solution, providing a viable financing option for those with less-than-ideal credit scores. This page explores the benefits of second charge mortgages for individuals facing credit difficulties.
Can You Get a Second Charge Mortgage with Bad Credit?
A second charge mortgage can be suitable if you have a bad credit history. Learn everything you need to know about second charge mortgages and bad credit here.
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Second Charge Mortgage and Bad Credit
Contents
Understanding Second Charge Mortgages and Bad Credit
A second charge mortgage is a secured loan taken out against the existing equity in your property, ranking behind your primary mortgage. It can be an attractive option for those who might not qualify for traditional refinancing due to their credit history.
Can You Get a Second Charge Mortgage with Bad Credit?
A second charge mortgage can be beneficial for those with adverse credit because it provides an opportunity to access funds without needing to refinance the primary mortgage, which might be difficult and expensive with a poor credit history.
This type of loan can help individuals consolidate high interest debt, make home improvements, or cover other significant expenses, potentially improving their overall financial situation. Additionally, second charge mortgages often have more flexible lending criteria than remortgages and can be structured to accommodate borrowers with less-than-perfect credit, offering a viable financial solution when other options may not be available.
Why Consider a Second Charge Mortgage When You Have Bad Credit?
It can be a way to access financing
- Traditional first charge lenders can reject remortgage applications due to adverse credit ratings. A second charge mortgage provides an alternative route to funds, using your home equity as security
- Lenders may reject a remortgage for several reasons, such as poor credit history, insufficient income, high debt-to-income ratio, or lack of adequate down payment. Other factors leading to rejection include when the property itself does not meet the lender’s criteria or if the borrower has an unstable employment history
- In contrast, a second charge mortgage might be more successful because it often has more flexible lending criteria compared to first charge mortgages, making it an option for borrowers who might not qualify for a new first charge
It can be a cheaper option if you have bad credit
- While second charge rates are typically higher than first charge rates, refinancing your entire mortgage (remortgaging) when you have bad credit can be challenging and expensive as you’ll have a limited pool of products to choose from
- A second charge mortgage can work out cheaper than remortgaging when you have bad credit as a smaller proportion of your total borrowing will be on a higher rate and your existing mortgage will stay in place. Whereas, if you chose to remortgage with bad credit, your total borrowing will likely be moved onto a higher rate
- Opting for a second charge over a remortgage can be a way to release additional equity from your home without losing your existing mortgage rate or paying ERCs (early repayment charges)
- Second charge mortgage rates can also be more competitive than unsecured loans, especially for those with poor credit
You can avoid high penalties on existing mortgages
- Refinancing your first mortgage might not be an option due to high exit fees or loss of a favourable interest rate due to bad credit
- A second charge allows you to release equity and borrow more without altering your existing mortgage terms
It can improve your credit score
- Successfully managing and repaying a second charge mortgage can help rebuild your credit profile over time
- This means that when it does come time to remortgage, you’ll be able to secure a lower rate overall
It can be a way to consolidate debt
- One way in which you can use a second charge is to consolidate debt
- This may not be an option for everyone but for some adverse credit borrowers, a second charge can help them pay off unsecured loans with higher interest rates or approaching deadlines
- These various debts can be consolidated into one second charge loan on the property that has a more manageable repayment plan over a longer period of time
Benefits of Second Charge Mortgages for Adverse Credit Applicants
- Tailored lending solutions: lenders specializing in second charge mortgages often provide more flexible criteria tailored to the needs of adverse credit borrowers
- Debt consolidation: you may be able to consolidate high interest debts into a single, more manageable loan with potentially lower monthly payments
- Raising funds for urgent needs: second charge mortgages are ideal for covering significant expenses like home repairs, medical bills, or other urgent needs without the strict requirements of unsecured loans
Risks of Second Charge Mortgages for Bad Credit Applicants
- Risk to your home: as with any secured loan, your home is at risk if you fail to keep up with payments
- Overall cost: it’s crucial to consider the total cost of borrowing, including interest rates and any additional fees. Your bad credit mortgage broker can help you do this
How to Apply for a Second Charge Mortgage with Bad Credit
- Assess your equity: determine how much equity you have in your home as this dictates how much you can potentially borrow. The amount of equity you have in your property is simply your home’s value minus your outstanding mortgage
- Review your financial situation: understand your current financial status and how a second charge mortgage fits into your budget and debt management strategy. Your mortgage broker can give you information on this and it’s a good idea to speak to a financial adviser
- Consult with specialists: speak with mortgage advisors like our team members who understand the complexities of adverse credit lending to find the best rates and terms available
- Compare offers: don’t settle for the first offer; compare multiple lenders who specialize in adverse credit to ensure you get the best possible deal. A second charge mortgage broker can do this for you and explain your options
How to Improve Your Chances of Securing a Second Charge Mortgage with Bad Credit
If you’re looking to get a second mortgage with bad credit, here are some steps that can help.
- Pay off existing debt: paying off debts like credit cards or car loans can improve your debt-to-income ratio and can boost your chances of approval, as you’ll appear more creditworthy to lenders
- Work on improving your credit score: this step will likely take the longest, but it’s worth it in the long run. Make sure to pay all of your bills on time and avoid maxing out your credit. Also, check your credit report for errors and dispute any mistakes that you find. And if you aren’t on the electoral roll, make sure you add yourself to it as soon as possible
- Don’t limit yourself to high-street banks: mainstream lenders are much less flexible when it comes to bad credit second mortgages, as they have very strict criteria. You may have better luck with applying with a lender through a bad credit mortgage broker like John Charcol
By taking these steps and being diligent with your finances, you may be able to increase your chances of getting a second mortgage at a competitive rate.
How Long Does a Second Charge Mortgage Stay on Your Credit Report?
A second charge mortgage stays on your credit report for as long as the account remains open and active. Once the mortgage is paid off and closed, it will typically remain on your credit report for up to 6 years from the date of closure. During this time, it will show the account’s status and payment history, which can impact your credit score positively or negatively depending on how well the payments were managed.
Maintaining timely payments on a second charge mortgage can help improve your credit score over time, while missed or late payments can have a detrimental effect. It is important to monitor your credit report regularly to ensure the information is accurate and to understand how your financial behaviours are influencing your credit health.
For those with adverse credit, a second charge mortgage can offer a lifeline for financial stability and an opportunity to improve your financial health. By leveraging the equity in your home, you can access necessary funds, consolidate debts, and potentially rebuild your credit score.
How Do I Find Second Mortgage Lenders for Bad Credit?
Many second mortgage bad credit lenders only through intermediaries like John Charcol. This means that using a broker will give you access to more lenders and better rates, giving you the best chance of securing a competitive deal.
These lenders are able to have more flexible criteria when it comes to bad credit as they look at your overall circumstances and assess every application on a case-by-case basis. It’s important to note that while bad credit mortgage specialists provide a great alternative for those who have been denied by traditional second charge lenders, they often also charge higher interest rates or fees.
To find a specialist bad credit lender that is willing to work with you and offers the best terms, your best bet is to consult an independent, specialist mortgage broker. At John Charcol, we can help you find the right lender and make sure that the loan is structured in a way that fits within your budget and goals. We have access to the whole market and know how to ensure that you get the best deal, even if your credit score isn’t perfect.
Contact us at 023 8235 2300 to discuss your options and see how a second charge mortgage might work for you.
