What is a Second Mortgage?

There are many ways to use a second mortgage in the UK, with more people than ever utilizing these products to acquire secured loans.

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What is a Second Mortgage?

There are many ways in which to use a second mortgage in the UK, with more people than ever utilizing these products to acquire secured loans, using a property as security. These secured loans, which may also be known as ‘second charge mortgage’ products work in a similar way to a traditional mortgage but with a few differences.

With a traditional mortgage, often referred to as a ‘first charge mortgage.’ A large loan [mortgage] is lent to the property owner, with their property acting as collateral for the lender on the loan. This means that should the borrower fail to make their repayments; the borrower’s property is at risk of being repossessed to repay the large amount borrowed. First charge mortgages will always get precedence when it comes to repaying a loan secured on the same property.

A typical mortgage will provide the money needed, secured against a portion of the property’s equity. For example, a borrower, owning a property worth £750,000 may need to borrow £250,000 to help with the purchase of a second property. A lender may agree to provide the loan, secured against a third of the property’s equity. The borrower will then need to pay back the loan capital (amount lent) plus interest by the end of the mortgage term.

How do Second Mortgages Work?

Second mortgages work using the same principle as traditional mortgages, whereby the loan is provided, secured against a portion of a property’s equity. However, there are some fundamental differences to consider when it comes to second mortgages:

Stricter Borrowing Rules – Although mortgages are always covered by strict criteria, with borrowers needing to meet certain requirements to be able to acquire their chosen loan, second mortgages have even stricter rules to adhere to. This is because as a second mortgage, they are generally not used to buy a borrower’s primary place of residence and so there are rules in place to govern this.

More Expensive – Second mortgages, as they are not necessities will have higher interest rates and charges associated with them than first charge mortgages. This is primarily due to the risks that the second charge lender takes when they lend to the borrower, as should there be a failure to repay any loans, the first charge lender will always get precedence and priority before the second charge lender does.

Specialist Lenders – Some banks and traditional lenders are able to offer second charge mortgages. However, to get the best rates and to get a better view of the market, there are a wide range of specialist second charge lenders who you will more than likely need to consider and so getting financial advice form industry professionals and experts is key.

What are Second Mortgages Used for?

When it comes to first charge mortgages, they are generally used for the same few purposes which are likely to include:

  • Home purchase
  • Home improvements
  • Home expansion
  • Purchasing a second property

Second mortgages however, are used for slightly different purposes and will run alongside your first charge mortgage. This means that you will need to keep up repayments on both mortgages, regardless. Common uses for second mortgages include:

Alternative to Remortgaging – Although remortgaging and moving to a new mortgage provider or mortgage product can save you many thousands of Pounds in interest and fees, sometimes there are large Early Redemption Charges (ERCs). Therefore, if a borrower needs to remortgage to borrow against further equity as the primary mortgage has been in part paid off, they may be forced to pay ERCs. A second mortgage allows them to use that equity, whilst staying with their primary mortgage and avoiding any ERCs.

Business Investments and Starting Up – A common use of second mortgages is for starting up a business or to inject some potentially much-needed funds into a business venture. There is no specific business this must be used for which means you may invest in principle in any viable venture ranging from a hair salon in London to a tech company in Manchester and all in between. Many first charge mortgage lenders will not necessarily lend for this purpose and they may not be willing to lend the amount you need, so second mortgages help with this.

Debt Consolidation – For many people, the reason for borrowing a second mortgage is for debt consolidation. They may, for a host of reasons not be able to remortgage which would entail changing their current mortgage. Hence, a second mortgage may be able to be used to clear a range of debts. The borrower then simply pays the second mortgage off as a single debt. Furthermore, when in a position to remortgage, they may take the second mortgage into account. Then, so long as both the first and second charge lenders agree, they can consolidate both mortgages into a single mortgage as a first charge to be repaid.




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