Although finally we seem to be stepping out of the recession, borrowing money can still seem out of reach to some. Banks can be resistant to lending money due to an increased risk of non-repayment. Some borrowers have responded to this by opting for a second charge mortgage, which secures the loan against a property or asset, and therefore lowers the risk held by the lender.

What is a second charge mortgage?

With a second charge mortgage, collateral, such as your home, is used as security for the repayments. If a second charge mortgage is not repaid, the lender has the legal power to take what is owed from the property on which the borrowing was secured or even repossess the home.

What can I use a second charge mortgage for?

Second charge mortgages are typically loans for higher amounts, so are often used to consolidate existing debt. Another popular use for a second charge mortgage is to spend it on home improvements. This investment in the property will hopefully increase its value when the time comes to sell.

Will I be eligible for a second charge mortgage if my credit rating is poor?

Lenders look far more favourably on potential borrowers with a poor credit rating if they are prepared to secure the borrowing against their home. This gives lenders the security that they will definitely be repaid, either from a monthly repayment or albeit in the most extreme of circumstances, by repossession of the house.

Can I borrow a higher amount than I could with an unsecured loan?

Yes. Second charge mortgage lenders often provide a longer repayment period due to the lowered risk. An unsecured loan, for example, is usually capped at £25,000 and is usually taken out over a term of 5 years. A second charge mortgages typically have terms available up to 30 years, making a higher amount more manageable to repay. However, although small repayments over a long repayment term may seem desirable, don’t forget that the longer the interest period, the higher the overall interest to be paid.

Are the interest rates higher with a second charge mortgage?

Second charge mortgage interest rates are usually comparably lower than those of an unsecured loan. This is because second charge mortgages are usually a high sum taken out over a long period of time. The amount of borrowing and the term length influences the interest rate, as well as the amount of equity that is left in your home.

What are some of the disadvantages of a second charge mortgage?

  1. Your home is at risk should repayments not be made.
  2. Make sure that you check whether the interest rates are fixed or variable. If variable, they will change alongside the economic climate or the lender’s criteria so you must be prepared for this in your monthly budgeting.
  3. Administrative fees and legal costs.
  4. Paying off a second charge mortgage before the agreed term has ended can incur a ‘early settlement charges’. The legal costs associated with the setting up of a second charge mortgage are often included in the quoted APRC along with the associated administrative fees. These charges highlight the importance of choosing the right loan for your long-term requirements.

Are there similar alternatives to second charge mortgages?

Some homeowners choose to release some equity from their home by switching their first charge mortgages. For example, if your home was worth £350,000 but your mortgage was at £250,000 you may choose to switch to a £300,000 mortgage, giving you £50,000 to spend on home improvements. You can also save money by switching to a mortgage with a lower interest rate.