Second charge mortgages, also known as second mortgages, are a type of loan you can take out that is secured on the equity you have in your home, and are taken out on top of your existing mortgage.
Despite often having higher interest rates than a first mortgage, they are proving increasingly popular with homeowners who may need to raise money to cover soaring living costs and whose existing mortgage provider won’t lend them extra funds. Second charge mortgages are also often used by people who might have unsecured debts they want to consolidate.
Figures released by the Finance & Leasing Association (FLA) show that second charge new business volumes were up 25% in June 2022 compared to the same month in 2021 with 2,854 new agreements made. In the three months to June 2022, the number of new agreements rose by 37% compared to the same period a year earlier, to 8,529 new agreements with a value of £390m.
Here we explain how second charge mortgages work, what the pros and cons are and look at some alternatives to consider if you’re looking to unlock some of the equity in your home.
What is a second charge mortgage?
A second charge mortgage is a type of secured loan that uses the equity you’ve built up in your home as collateral against the money you want to borrow. This loan is taken out through a different lender to your existing mortgage lender.
For some people, a second charge mortgage can be the cheapest and easiest way to release some of the money they have built up in their home, especially for those who might be worried about remortgaging, perhaps because their circumstances have changed. However, as you will effectively have two mortgages on the same property, if you are unable to pay either one of them, you could risk losing your home. It is this risk that means for the majority of people second charge mortgages are usually considered a last resort.
When might you want a second charge mortgage?
The main reasons people opt for a second charge mortgage include funding home improvements, or if they’re struggling to find a good remortgage deal due to issues with credit, or because they have just become self-employed and can’t remortgage because they don’t yet have two years of accounts to show lenders.
While some people may take out a second charge mortgage to help with debt consolidation, it’s very important to understand that if you are already struggling with your initial mortgage payments, it’s not a good idea to take on a second charge mortgage. As mentioned, second charge mortgages often have higher interest rates than a first mortgage, as well as a second round of mortgage fees and charges. Ultimately, if you are in this situation, it’s likely that you will struggle to pay either or both of your mortgages and could be at greater risk of losing your home. If you’re finding it difficult to manage your debts, read our guide How to take control of your debts.
However, there are a few scenarios where taking out a second charge mortgage might work for you. These could include:
- If you can’t remortgage because you’d have to pay high early repayment fees to leave your current mortgage – most mortgage providers will include early repayment fees in their mortgage agreements, especially if you’ve opted for a fixed term mortgage. This means that if you want to switch your mortgage to a different deal or provider to raise additional funds during the mortgage deal term, you could be hit with hefty charges.
- Your current mortgage offers very low interest rates and you can’t find a remortgage deal that offers the same or better.
- Your credit rating has changed or worsened since you got your mortgage – This would make remortgaging much harder.
Even if one of the above situations applies to you, it doesn’t always mean that you should opt for a second charge mortgage, as the risks often outweigh the benefits. Remember too that securing debts on your property puts you at a higher risk of losing your home if you don’t keep up with your repayments.
How does a second charge mortgage work?
A second charge mortgage, as the name suggests, is essentially a second mortgage you take out against the equity you have built up in your home. You can usually borrow anywhere from £1,000 up to £1m, although the amount you can borrow will obviously depend on the value of your home.
You can work out how much equity you have in your property by finding the value of your home and taking away your outstanding mortgage. The remainder is the equity you currently have. Remember this can change over time as house prices move up and down.
Not everyone will be eligible for a second charge mortgage, as lenders will usually require you to have a large amount of equity in your home before they will consider lending to you. In most cases the lender will want you to have at least 20%-30% in equity in your home after deducting your existing mortgage and their loan. For example, if your property is worth £400,000 (100%) with a remaining mortgage of £200,000 (50%) and you want to borrow £100,000 (25%) via a second charge mortgage you will effectively have 25% remaining in equity.
It’s also worth noting that if you’ve previously taken a mortgage payment holiday, or have ever been late with your mortgage payments, you may not be approved for a second charge mortgage.
If you move or decide to sell, you will need to settle your initial mortgage first and then the second charge mortgage after this, but both must be repaid in full.
What are the downsides of second charge mortgages?
While for some people second charge mortgages can be a good way to release funds, there are some significant risks involved, so it’s important to fully understand exactly what you’re signing up to. For example:
- You will have two mortgages secured on your property, and if you struggle to pay either of them you risk losing your home.
- Your credit rating could be negatively affected if you make late payments or miss one.
- Interest rates can be high on second charge mortgages, especially if you have a less than perfect credit rating, so you could end up paying a lot more to borrow in the long term.
- Depending on how long your second charge mortgage term is, you could end up paying this into retirement, meaning you’ll have less income available to spend on other things.
- You will be paying another set of mortgage costs and fees to set up your second charge mortgage.
A second charge mortgage is a huge financial commitment, so before signing on the dotted line, you should make sure that you are confident you can pay for it and all the fees that come with it, both now and in the future.
If you are considering a second charge mortgage, it’s always a good idea to shop around before settling on a product. There are a range of mortgage providers and brokers in the market, including mortgage broker, John Charcol and My Secured Loan, both of which offer advice on second charge mortgages, as well as the products themselves.
Some alternatives to consider
The risks of second charge mortgages are considerable, and there are a number of alternatives you may want to consider. Seek professional financial advice if you’re not sure which option is right for you, as each will have its own advantages and disadvantages, and the right one for you will depend on your individual circumstances. Some alternatives may include:
If your main reason for considering a second charge mortgage is to release funds to make home improvements, remortgaging could be one way to do this. Given current low mortgage rates, you may even be able to reduce your monthly payments despite the fact you’re borrowing more. For more reasons on why remortgaging may be a good option, have a look at our article Four good reasons to remortgage right now. If you are struggling financially, you might still be able to remortgage. Our article Can I remortgage if I’m struggling financially has some tips that might help you.
If you are looking to free up some cash from your home and are aged 55 or older, then equity release could be one option to think about. Of course equity release comes with its own issues and risks, and won’t be right for everyone, but the main advantage is that you don’t have to make monthly payments, as any money you release, plus the interest you owe, only has to be repaid when you die or move into long term care. We have a range of equity release guides that can provide you with all the information you need.
If you’re considering equity release, you can find an adviser via the Equity Release Council’s (the trade body for the equity release sector) website here.
If you’re looking for somewhere to start, you can get expert advice from a Rest Less Mortgages equity release specialist. They are active members of the ERC and can advise on equity release mortgages from the whole of the market. They’ll listen to your needs and talk you through your options, so you can decide if equity release is the right option for you.
Retirement interest-only mortgages
If you’re aged 55 or over, are still working or have an income, you may qualify for a retirement interest-only mortgage that won’t need to be repaid until you die or move out. These fall somewhere between a standard mortgage and an equity release product, and are specifically designed for borrowers in their 50s and 60s.
RIO mortgages are typically easier to qualify for than standard interest-only mortgage deals, which usually come with age restrictions for when the debt must be repaid. However, you’ll probably need a significant chunk of equity in your property to qualify.
With a RIO mortgage, you make interest payments each month, unlike equity release plans where interest rolls up over your lifetime. Lenders’ criteria to qualify for a RIO mortgage can often be quite strict, as you’ll need to demonstrate you have enough income to cover your interest payments when you’re no longer working.
Find out more in our articles How retirement interest-only mortgages work and What’s the difference between a lifetime mortgage and a retirement interest-only mortgage?
Speaking to an experienced mortgage advisor can help you to understand your options and get a great deal on your mortgage. If you’re looking for somewhere to start, you can speak to a Rest Less Mortgages advisor and get high quality advice on residential, retirement interest-only, equity release and buy-to-let mortgages.
Whichever option you choose, it is always important to make sure you fully understand any financial obligations you sign up to, especially when your home is at stake.