When is A Second Charge Mortgage The Right Solution to Release Equity from Your Property?
Written on 5 October 2018 by
If you’re looking to release equity from your home for renovations or to fund further property investments, consolidate debt, pay a tax bill or for any reason, then a second charge mortgage could allow you to do so without the need to remortgage.
So what is a second charge mortgage? Second charge mortgages, or secured loans as they are also commonly known, use your home or property as security. You do have to be a homeowner to get a second mortgage, although you don’t necessarily need to live in the property. A second charge mortgage allows you to use any equity you have in your home as security against another loan. After taking out a second charge mortgage you essentially then have two mortgages on that property.
Before the recession if a client was turned down for borrowing from standard or sub-prime lenders, they might have turned to a secured loan as a last resort and as a result the rates and fees were very high.
But changes in the mortgage market mean that this type of lending is no longer as expensive as it was and because it’s now regulated by the FCA it’s now a very credible and acceptable option. Independent brokers, such as John Charcol, now have access to a range of highly competitive second charge mortgages.
What you need to know if you’re considering a second charge:
Second charge mortgages do have a higher interest rate than most residential and buy to let mortgages because they reflect the fact that they pose a greater risk to a lender. For example, if your house were to be repossessed, the lender who provides the first legal charge (or main mortgage provider) will have access to the monies available from the sale; the provider of the second charge loan will then take what they are owed from the residue funds.
Who is a second charge mortgage suitable for?
Clients take a second charge mortgage for a whole range of reasons, the most common include:
You’re a current mortgage prisoner: If you are lucky enough to have an excellent lifetime tracker on an interest only basis taken out when the Bank of England base rate was much higher you would be paying almost no interest on your borrowing. Clearly you wouldn’t want to lose that rate, but you might need to borrow £50,000 to fund home improvements. Your current lender might allow you to remortgage but your whole mortgage repayment would go onto a much higher rate. Not particularly attractive. So instead of giving up your existing rate, you could borrow the additional money via a second charge mortgage, and protect that rate.
To avoid early repayment charges: You might be locked into a fixed term mortgage with a significant early repayment charge and find yourself needing to borrow further money for a project. You approach your current lender and they refuse, so you look at remortgaging elsewhere. You find a new bank who is happy to take you on, but now you find yourself having to pay a large penalty for leaving your present mortgage deal. Instead of leaving you opt for a second charge mortgage and avoid a significant early repayment charge. In this example your adviser at John Charcol could run a cost comparison to see whether it is cheaper to remortgage or take out a secured loan.
More flexibility: Standard lenders may not provide a mortgage to you if you are using the money for certain reasons for example to pay off a tax bill or for business purposes. So, if you wish to borrow money under these circumstances, a second charge mortgage may provide the answer. The providers in this market are often more flexible, so long as they understand what you are trying to achieve.
- Speed: Sometimes you need to move very fast and have funds available quickly. Speed, unfortunately is not something the current mortgage market is known for. However a second legal charge can often be executed far more quickly.
For more information on second charge mortgages enquire now or speak to an expert now on: 0344 346 3672
The blog postings on this site solely reflect the personal views of the authors and do not necessarily represent the views, positions, strategies or opinions of John Charcol. All comments are made in good faith, and John Charcol will not accept liability for them.