We understand – there might be numerous reasons why you’d need additional funds. Perhaps you now have a new family member and therefore, considering a bedroom extension. Or your home needs a major repair. On the other hand, you might need to raise money to meet your personal costs such as emergency medical bills, college fees or paying a down payment on your new vehicle. But if you already have a personal loan, taking out a new line of credit can be difficult. Luckily, a second charge mortgage can be your best bet!
What is a second charge mortgage? Can you get a second mortgage? Is it a good financial decision or a risk? Let’s delve in deeper to help you make an informed choice.
What is a Second Charge Mortgage?
Do you own a home and have a mortgage running already? Congratulations!! You might be able to tap into the equity of your home and take out a second mortgage to get extra cash!!
A 2nd charge mortgage is a type of secured loan, which you can get based on the equity accumulated on your home. It isn’t the same as a ‘top-up loan’ or ‘remortgaging’ from your current lending company, but taking a second loan from a different lender.
While you must own a property and have a mortgage on it to get a second charge mortgage, you do not necessarily have to live there permanently to secure a loan. The property acts as collateral to help you take out a second mortgage. Remember, it is entirely different from your first mortgage. This means you will have two outstanding mortgages on the same property. If you default on any of them, you could potentially lose your home.
How Does Second Charge Mortgage Work?
The process of taking out second charge mortgages is similar to that of securing a “first-charge” mortgage, i.e., the current mortgage on your home. However, second charge mortgage lenders will determine the total amount you can borrow based on the equity in your home. You can compute your equity by deducting the amount you still owe on your mortgage from the present value of the property.
To get a second mortgage, you need to submit an application with the lender and provide documents related to your income, assets and debts. Many second-charge lenders will require you to get an appraisal to determine the present value of your property. You can also use a simple second charge mortgage calculator online to know how much you can borrow.
The eligibility requirements may vary, but most lending companies prefer having at least 15% to 20% equity in your property. Depending on the outstanding amount on your current mortgage, you can borrow up to 85% of the home’s value. So, if you have a house worth £400,000 and there is £200,000 outstanding on your current mortgage, then you might be able to take out a second-charge mortgage of around £140,000 ® (£400,000 x 85%) – £200,000.
A mortgage calculator for 2nd mortgage can be helpful in determining the amount you can secure as a loan.
Understanding the Pros & Cons of a Second Charge Mortgage
A second-charge mortgage can be a good idea if you want additional cash to meet your emergency funding needs. However, it also has potential drawbacks that you should consider before applying for a loan.
Pros
- Access equity on your home: Your home is the most valuable asset… and a second charge mortgage allows you to turn your otherwise illiquid asset into cash that you can use.
- Multiple purposes for securing a second mortgage: Unlike your first-charge mortgage that you should use on buying a home, you can use the second mortgage for buying a second home to rent, renovations, etc.
- Lower interest rates: Second charge mortgage rates are typically lower than your first mortgage and even credit cards and personal loans.
- Tax benefits: If you are using the loan for home repairs or extensions, the interest on your mortgage can be tax deductible.
Cons
- Limit on the amount you can borrow: The amount you can borrow is determined by how much you outrightly own on your home, often limiting your loan size.
- A new payment: Taking out a second mortgage would mean you are adding monthly obligations.
- Risks associated with your home: Securing another mortgage with your home as collateral puts your property at risk. If you default on both mortgages, you may lose your home.
Conclusion: Is a Second Charge Mortgage a Good Idea?
Whether you should take a second charge mortgage or not depends on a lot of factors, including how much equity you have in your home. However, you should also keep in mind the second mortgage loan rates, your needs and the eligibility requirements of the lender. A second mortgage can help improve the worth of your home as you are taking out home equity to build more equity. Additionally, it can be a good financial strategy to pay off your expensive debts with a cheaper loan option.
Attention: Late repayments can cause you serious money problems. For help go to moneyhelper.org.uk
