Second Charge Mortgages Rates Explained

A second charge mortgage, also known as a second mortgage, is a loan secured against a property that already has an existing mortgage. This type of loan allows homeowners to unlock equity in their property without needing to remortgage. The second charge is also with a different lender from the first charge and is a separate product with its own interest rate and terms.

Are Second Charge Mortgages Expensive?

Interest rates on second charge mortgages tend to be higher than those on first charge mortgages. The primary reason for this is the increased risk for lenders. In the event of repossession, the first mortgage lender has priority in reclaiming the owed amount from the sale of the property. The second charge lender only receives payment after the first mortgage has been fully settled. This secondary position means that the second charge lender faces a greater risk of not being repaid in full, prompting them to charge higher interest rates to offset this risk.

Do I Need a Second Charge Mortgage Broker?

A second charge mortgage can be a useful financial tool for homeowners looking to access the equity in their property. However, due to the higher interest rates and the complexities involved, it is often beneficial to seek the assistance of a professional mortgage broker.

What Are Typical Second Charge Mortgage Rates?

Second charge mortgage rates vary significantly based on several factors, including the borrower's financial situation, credit history and the amount of equity in the property. Generally, second charge mortgage rates tend to be higher than first charge mortgage rates due to the increased risk for lenders.

Here’s a closer look at what you can expect.

Factors Influencing Second Charge Mortgage Rates 

  1. Credit history: borrowers with a strong credit history may qualify for lower interest rates, while those with poorer credit scores might face higher rates due to the perceived increased risk
  2. Existing mortgage: the balance and terms of your existing first charge mortgage can influence the rates offered on a second charge mortgage – e.g. some second charge lenders will charge higher rates if your first charge is interest-only as you won’t be building up equity in the property
  3. LTV (loan-to-value ratio): second charge mortgage lenders look at the combined LTV of the first and second charge mortgages (i.e. your total mortgage borrowing compared to the value of the property). Lower total LTV ratios typically attract more favourable rates, while higher LTV ratios may result in higher interest rates
  4. Income and affordability: lenders will evaluate your income and overall financial stability to determine the likelihood of you being able to repay the loan, impacting the interest rate offered
  5. Market conditions: broader economic factors and lending market conditions can also affect second charge mortgage rates. Interest rates may fluctuate based on the economic environment and lender competition

What Is the Average Interest Rate for a Typical Second Charge Mortgage?

Second charge rates can vary and what’s available to you will depend on your circumstances, so there’s no clear average rate. Nonetheless, as a guideline based on current (2024) market trends, you could expect typical second charge mortgage rates to range from around 3% - 12%.

Here’s a general breakdown for what second charge loan rates could be available to you should you be a prime or subprime borrower:

  • Prime borrowers: those with excellent credit, low LTV ratios and stable income may see rates in the lower end of the range, often between 5% - 7%
  • Subprime borrowers: individuals with lower credit scores or higher LTV ratios may encounter rates at the higher end of the range, typically between 7% - 12%

How to Get the Best Second Charge Mortgage Rates

Given the variability in second charge mortgage rates, there are quite a few things you can do to ensure you get a competitive deal.

To access the best second charge mortgage rates and deals, you can:

  1. Shop around: compare offers from different lenders to find the most competitive interest rates and favourable terms
  2. Improve your credit score: a better credit score can help secure lower interest rates. Consider taking steps to improve your credit profile before applying
  3. Consider LTV (loan-to-value): lower LTV ratios can often secure better interest rates, as they represent lower risk to the lender. Therefore, if possible, consider borrowing less on the second charge
  4. Use a second charge mortgage broker:
    • Consulting a mortgage broker like John Charcol is easiest way to ensure you find the best deal for your situation, with as little hassle as possible. This is simply because your adviser will do all the work from gathering necessary documentation to liaising with lenders, and use their expertise and experience to find you the most suitable solution
    • Your mortgage advisor will be able to use your personal financial details to find the best available rates tailored to your situation, rather than generic and potentially more expensive high street deals. They can provide an objective assessment, helping you weigh the benefits and drawbacks and how they apply to your specific circumstances
    • Brokers have access to a broader spectrum of lenders, including those who may not deal directly with the public. This access increases your chances of finding a lender who is willing to offer favourable terms based on your specific situation
    • Experienced brokers often have established relationships with lenders. They can leverage these relationships to negotiate better terms or rates on your behalf, potentially securing a more favourable deal than you might achieve on your own

First and Second Charge Mortgage Comparison Example

Here is an example of a first and a second charge mortgage and how they differ, including loan amount, interest rate and potential monthly payments.

First Charge Mortgage

  • Loan amount: £200,000
  • Interest rate: 3%
  • Monthly payment (30 year term): approximately £843

Second Charge Mortgage

  • Loan amount: £50,000
  • Interest rate: 6%
  • Monthly payment (15 year term): approximately £421

Why Do Second Charge Mortgages Have Higher Interest Rates?

Second charge mortgages typically come with higher interest rates compared to first charge mortgages.

Here’s a detailed explanation of why this is the case and some considerations to keep in mind.

Increased Risk for Lenders

  • Subordinate position: second charge mortgages are subordinate to first charge mortgages. This means that in the event of a foreclosure or sale of the property, the first mortgage lender is paid first. The second charge lender is only paid after the first mortgage has been fully settled. This increases the risk that the second charge lender won’t receive full repayment, which is why second charge lenders compensate by offering higher interest rates
  • Recovery risk: if the property value declines or if there is insufficient equity to cover both the first and second mortgages, the second charge lender will again face a higher risk of not fully recovering their loan

Borrower’s Financial Profile

  • Creditworthiness: borrowers seeking a second charge mortgage might have higher existing debt levels or a need for additional borrowing, which can indicate higher risk. Lenders offset this risk with higher interest rates

Loan Amount and Terms

  • Smaller loan amounts: second charge mortgages are often smaller in amount compared to first mortgages, and lenders may charge higher rates to make these loans financially viable
  • Loan terms: the terms of second charge mortgages, including shorter loan durations or different repayment structures, can also influence the interest rates charged

Compare Second Charge Mortgages

Second charge mortgages are highly bespoke financial products, tailored to the unique circumstances of each borrower. Unlike standard first charge mortgages, which often have more uniform terms and widely available rates, second charge mortgages vary significantly based on individual factors such as credit history, property value, equity and existing mortgage terms. This variability makes trying to compare second charge loans a daunting task for most borrowers.

Engaging a mortgage broker such as John Charcol simplifies this process, providing tailored comparisons based on your individual circumstances.

Nonetheless, it’s always a good idea to understand what you’re looking for, so here are some key considerations to help you get started when comparing second charge mortgages.

  1. Overall cost:
    • Higher interest rates on the second charge mortgage mean higher overall interest costs. It’s important to calculate the total cost of borrowing when considering a second charge mortgage. Your mortgage broker can help you do this
  2. Financial flexibility:
    • While the interest rate is higher, a second charge mortgage can provide access to funds without disturbing the terms of the first mortgage. This can be beneficial if your first mortgage has particularly favourable terms or if refinancing would incur significant penalties
  3. Alternative options:
    • Remortgaging - depending on current interest rates and the terms of your first mortgage, remortgaging might offer lower overall interest rates compared to a second charge mortgage, but it could involve early repayment fees and higher upfront costs
    • Unsecured loans - personal loans or credit cards might offer a faster and simpler borrowing process, but usually at even higher interest rates compared to second charge mortgages

Get Second Charge Mortgage Deals Now

While second charge mortgages typically come with higher interest rates due to the increased risk for lenders, they can still be a useful financial tool for accessing additional funds. Contact us on 0330 433 2927 to find out what kind of second charge mortgage deals are available to you.