Why The Saying ‘Never Settle For 2nd Best’ Isn’t Always True

Written on 13 December 2022 by Nicholas Mendes

There is a growing demand for Second Charge Mortgages, also known as a 'Secured Loan' or 'Second Mortgage' which effectively allows you to borrow money, whilst leaving your existing mortgage in place.

With many households now holding a fixed rate mortgage, a recent review by the Bank of England outlined:

"Mortgages with long-term fixed rates (five year or more) now account for half of new mortgage lending. Cheaper borrowing costs are driving the product growth".

This is partially due to affordability changes and being able to borrow more on a 5-year fixed rate mortgage due to stress tests, but the average costs between the two had decreased making the 5 years more affordable.

With mortgage rate increases well documented over the last 12 months and households tied into a favourable fixed rate of the past, more homeowners are turning to their existing lender to raise funds rather than looking to remortgage and raise funds (whether remortgaging for debt consolidation or remortgaging for home improvements). This is often where many clients find the existing lender won’t allow them to raise the additional borrowing, as lenders factor in the cost-of-living increase as well as the increase in rates. As a result, turning to a 2^nd Charge for a period and then when the 1^st Charge comes up out of a fixed rate, look to consolidate both the 1^st and 2^nd Charge with a new lender.

Figures from September from the Finance & Leasing Association (FLA) mentioned the value of new Second Charge business secured in September increased by 42%. In total, £145m of lending was carried out across 3,138 new agreements – itself a 29% rise compared to the year before.

There are many reasons why someone would look at a 2nd Charge (alternatively consider 9 reasons to remortgage), the most common reasons would be the current mortgage lender will not allow you to raise any additional funds. 2nd Charge lenders often have a more favourable lending appetite meaning homeowners are able to borrow more, Lenders are also less concerned on the purpose, for example raising to pay a tax bill.

Alternately, you might be tied into a 5 year fixed the early repayment charge (ERC) would be too high to exit due to being in a long-term fixed rate. i.e., to exit a 5-year fixed, the ERC might be 5%, and when you consider the cost and time to take a 2nd charge, it would be more cost effective to take a 2nd Charge look to remortgage in 5 years' time to clear the 2nd Charge on a more competitive rate.

There is also the HELOC scheme (Home Equity Line of Credit) - this allows you to arrange a flexible facility on your property. This can be beneficial to higher income earners who are looking for a flexible facility for school fees or receive bonuses yearly and need a line of credit which gives them access to cash.

Lenders which offer HELOC deals are 'Selina' for regulated deals and 'Scroll' for unregulated deals.

The key thing is a 2nd Charge mortgage will allow you to avoid paying any Early Repayment Charges and raise the funds you need.

A 2nd Charge mortgage is essentially just a loan. This means that, even though it's secured against your home, you can spend the funds as you wish. Home improvements are the most common reason why people tend to get a second mortgage. Other reasons include starting a business, paying for a wedding or a 2nd property (read "How to remortgage to buy a second property"). You can also use a 2nd Charge to pay a tax bill which you cannot with many 1^st Charge lenders, making the options available more accessible for homeowners.

2nd Charges positives

1) Credit History - You may have had a change in circumstances and looking to debt consolidate as a result remortgaging to a new lender on a 1st Charge would mean a higher overall rate, 2nd Charge lenders often have more flexibility and the rate will be marginally higher than the 1^st charge but still more cost effective than the APR on Credit cards and unsecured loans. To ensure debt consolidation is the right option, our advisers will review all the options available. Remortgaging if you have bad credit can also be accommodated through an experienced broker like John Charcol.

2) Income affordability – Is more generous for both employed and self-employed, and typically start from an income multiple of 5.5x as lenders consider the 1st Charge payments but use the Net disposable income to calculate affordability.

3) Flexibility - Many 2nd Charge lenders will allow you to make overpayments or offer flexible facility, for example with the HELOC you can draw the funds when required in addition to amount and only pay interest on amount that has been drawdown.

2nd Charges Negatives

1) You have two commitments secured against the home, meaning if you fail to keep up repayments you home could be repossessed.

2) The rate is higher, speaking with a broker would be important to understand the overall costs and implications, as it may be worthwhile to remortgage and pay the early repayment charge to switch to a new 1^st charge lender.

Overall, a 2nd charge can be worthwhile option for many households and worth peaking with on of our brokers.

Contact An Experienced Mortgage Broker

If you’re worried about any of the topics in this article, or you’re coming to the end of a fixed rate and are concerned about how the rate increase will affect your mortgage payments, contact John Charcol on 0330 433 2927 and one of our expert advisers can help you figure out your next steps – whether they be debt consolidation, remortgaging, further advance, product transfer, reviewing your protection policies or something else entirely.