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How Does a Second Charge Mortgage Work?

Learn the definition of a second charge mortgage, how second charges work, what LTVs are available and more.

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Second Charge Mortgage Definition

A second charge mortgage, also known as a second charge loan or second mortgage, is a loan that allows you to borrow money against the remaining equity in your home after your first mortgage. It has no impact on your first mortgage and the money comes from another lender – i.e. not your existing mortgage lender.

Here’s an example:

You have a property worth £300,000 and a (first charge) mortgage of £200,000

This means you have £100,000 of equity (£300,000 – £200,000 = £100,000)

You could potentially borrow a portion of this equity through a second charge

Keep reading to find out more about what a second charge mortgage is, how it works and who might benefit from one.

What Does a Second Charge on a Property Mean?

Having a second charge on a property essentially means you have a second mortgage secured on it, in addition to but separate from your first (original) mortgage. Like with the first charge, the property acts as collateral for the second charge loan.

How Does a Second Charge Mortgage Work?

A second charge mortgage works by allowing a homeowner to take out a second loan using their property as collateral. This second mortgage is with a different lender from your existing one. It also operates completely separately to and has no impact on the primary mortgage already secured on the same property.

Priority of Charges on a Property

  • First charge – your primary mortgage, or first charge, has priority over any other loans secured against the property. In the event of a sale or foreclosure, the first charge lender is paid first
  • Second charge: the second mortgage lender is paid from any remaining funds after the first charge lender has been satisfied. This lower priority makes second charge mortgages riskier for lenders, hence the higher interest rates

The second charge mortgage is called as such because it literally takes second place priority on your home’s deeds. This means that, in the event of repossession, your first mortgage lender gets priority in terms of any repayment from the sale of your home, and the second charge lender receives whatever is left, if any.

In the majority of cases, the first charge lender will also need to agree for you to take out a second charge on the property. Your mortgage broker will go about obtaining this.

Who Uses a Second Charge?

  • Homeowners who are looking to raise funds without refinancing their existing mortgage
  • Individuals who may not qualify for a traditional remortgage due to credit issues or changes in financial circumstances
  • Those looking to fund significant expenses like home renovations, debt consolidation, or large purchases
Speak to a mortgage adviser

Second Charge Mortgage Process

Here’s a detailed breakdown of the second charge mortgage process.

  1. Equity assessment

    • Equity is the portion of the property that the homeowner owns outright, calculated as the property’s current market value minus the outstanding balance on the first mortgage
    • Lenders will assess the available equity to determine how much can be borrowed. Typically, they will allow borrowing up to a certain percentage of the property’s value, including both the first and second mortgages

  2. Application process

    • The homeowner applies for a second charge mortgage with a lender, often via a mortgage broker
    • Before submitting an application, the mortgage broker will go about obtaining consent for the second charge from the first charge lender. If the first charge lender does not give consent, your mortgage broker will discuss alternative options
    • The lender evaluates the applicant’s financial situation, including income, credit history, outgoings (such as first charge mortgage payments) and the equity in the property
    • The lender will want to make sure the borrower can afford both the second and first charge mortgage payments
    • The property may need to be revalued to ensure it has sufficient equity to support the second charge mortgage

  3. Approval and terms

    • If approved, the lender will offer terms for the second charge mortgage, including the loan amount, interest rate and repayment schedule
    • The interest rate on a second charge mortgage is usually higher than the first mortgage due to the increased risk for the lender

  4. Legal and administrative steps

    • The lender will register a second charge against the property with the land registry or relevant authority
    • This process involves legal documentation and may incur fees for valuation, legal work and administration

  5. Repayment

    • The homeowner makes monthly payments on the second charge mortgage in addition to their first mortgage payments
    • Repayment structures can vary; some second charge mortgages may be on an interest-only basis, while others require capital and interest repayments

Key Considerations for a Second Charge on Property

Make sure you know what a second charge on property means for your circumstances and what to expect.

  1. Interest rates: expect higher interest rates compared to the first mortgage due to the increased risk for the lender
  2. Fees: be aware of additional costs such as arrangement fees, legal fees and valuation fees
  3. Repayment ability: ensure you can afford the additional monthly repayments, taking into account any potential changes in income or interest rates
  4. LTV (Loan-to-value): understand the maximum LTV ratio that lenders are willing to offer, which includes the combined amount of the first and second mortgages relative to the property’s value
  5. Research: ensure the costs associated with a second charge mortgage are justified by the benefits. The easiest way to do this is to speak with a mortgage broker
  6. Terms and conditions: make sure you understand the terms and conditions fully before proceeding – including: the risks, the costs, the time period, the present and future impact on your circumstances and more
  7. Alternative options to second charge lending: always consider alternative lending options before make a decisions. For example, could remortgaging or a further advance better suit your needs? Discuss this with a mortgage broker

What Are the Advantages of a Second Charge Loan?

  • Access to additional funds: allows homeowners to access funds without remortgaging or disturbing the existing favourable terms of the first mortgage
  • No impact on first mortgage: you can secure a second charge loan while keeping your current mortgage rate untouched
  • Flexibility: funds can be used for various purposes, such as home improvements, debt consolidation, or other significant expenses
  • Loan size: depending on your home’s equity, you could access larger sums than typical personal loans
  • Potentially lower interest rates: compared to unsecured loans, second charge mortgages may offer lower interest rates because the loan is secured against your home.
 

What Are the Disadvantages of a Second Charge Loan?

  • Higher interest rates: second charge mortgages often have higher interest rates compared to first mortgages
  • Risk of repossession: failure to repay the second charge mortgage can lead to repossession of the property
  • Additional costs: the process involves various fees that can add to the overall cost of borrowing
  • Increased debt: your overall debt level increases, which could impact your financial stability
  • Risk of repossession: if you fail to make payments, your home is at risk as the loan is secured against it
  • Potential costs: fees and charges for arranging a second charge mortgage can be significant

What Is the LTV on a Second Charge Mortgage?

The LTV ratio for a second charge mortgage can range from 60% – 95%, depending on the lender and your personal circumstances. This LTV refers to the combined equity of the first and second charges. The specific LTV offered will be influenced by various factors, including the value of your property, the amount of equity you have, your credit history and your income.

How Does a Second Charge Mortgage LTV Work?

Not sure how exactly how a second charge mortgage LTV works in relation to the first charge?

Let’s break it down for you.  

Example

  1. Your property is worth £300,000
  2. You have an outstanding first mortgage amount of £150,000
  3. The available equity in your property is £300,000 – 150,000 = £150,000
  4. The second charge lender allows you to borrow up to 75% LTV for the combined loans (first and second charge)
    • So, 75% of £300,000 = £225,000
    • Then subtract the outstanding first mortgage from the available maximum equity for the whole property: £225,000 − £150,000= £75,000
    • So, the maximum second charge mortgage available could be up to £75,000, subject to affordability and lender criteria
 

Find Out if a Second Charge Loan Is Right for You

A second charge mortgage provides a way to access additional funds secured against a property already mortgaged. While it can be a useful financial tool, it’s crucial to consider the higher costs, potential risks and your ability to meet the repayment obligations. Consulting with a second charge mortgage broker like John Charcol can help determine if a second charge mortgage is the right option for your needs.

How to Apply for a Second Charge Mortgage

  1. Assess finances: review your financial situation to ensure you can handle additional debt

  1. Get advice: consult with a mortgage broker to explore the best options available to you

  1. Compare lenders: look at different offers to find the most favourable terms
 

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