Can I use a second charge loan to release equity?

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Can I use a second charge loan to release equity?

Family looking to use a second charge loan to release equity
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    A second charge loan is an alternative to other forms of raising funds, such as a personal loan or equity release. Here’s how it works. Find out if it could be right for you.

    A second charge mortgage is another loan secured on your property which already has a mortgage secured against it.

    What is a second charge loan?

    Second-charge loans, also known as second-charge mortgages, are secured loans against a property already mortgaged. There are benefits and considerations to using this for releasing equity from your property, so it’s worth consulting a mortgage broker like Simmonds Mortgage Services with expertise in this area before taking out a second loan on your home.

    How does taking out a second charge loan release equity in your property?

    The second charge mortgage is a secured loan against your property that allows you to unlock equity in your property. How much equity you can release will depend on the property value and the impact on your finances of further borrowing. If you are unable to remortgage to release funds, this is an alternative worth exploring.

    What happens to my existing mortgage?

    Your standard mortgage is known as a first-charge mortgage. This means that in the event of repossession of your property, the first charge mortgage lender would be repaid before the second charge mortgage lender. You’ll need to do some careful calculations to make sure you can afford two mortgages on the same property before you take out a second loan.

    Benefits of second charge mortgages

    One of the biggest benefits is enabling you to access funds tied up in your property without switching away from your current lender. If your current mortgage has significant early repayment charges or a particularly favourable rate which you would lose by remortgaging, the second charge mortgage is a great option to consider.

    Some of the most common reasons why borrowers take a second charge mortgage are:

    • Home improvements – extra borrowing at mortgage interest rates which are typically much lower than personal loans is a good way to fund your loft extension or other sizeable refurbishments.
    • Debt consolidation – if you have multiple personal loans, other loans or credit card debts where you are paying more interest each month than a second charge mortgage would cost, this is a good way to simplify your finances into one monthly payment and save money too. Unsecured borrowing is typically much more expensive than a secured loan.
    • Property purchase – If you are looking to raise funds, for example as a deposit for a new residential property purchase, the second charge mortgage could be a good option, especially if you don’t want to forgo your existing interest rate deal. This can be a good way to release additional funds to help a child or other family member get on the property ladder.
    • Property Investors – If you want to expand your investment property portfolio, a second charge can be an excellent way to raise money from your existing portfolio. Affordable lending is available through a second charge so you can increase your buy-to-let property assets.
    • Other equity release – perhaps you want to go travelling, buy a new car or help out a family member with other costs. A second charge mortgage is an alternative to other equity release products.

    Drawbacks of second charge mortgage

    As with all financial products, you should consider any downsides to taking a second mortgage.

    The first and most obvious consideration is affordability – can you meet your main mortgage payment and the second mortgage payment each month? What happens if interest rates rise?

    The interest rate on second-charge mortgages is likely to be higher than on the first mortgage because second-charge mortgage lenders are taking more of a risk on you as a borrower. If you default on your mortgages, the first charge mortgage balance will be repaid first from the sale proceeds if you are repossessed.

    What is the difference between equity release and second charge loans?

    A home equity loan, also known as equity release works slightly differently, depending on the sort of equity release plan you choose. For more information on the options, check our equity release mortgages page.

    Some equity release plans do not require monthly mortgage payments to be made, as the loan is repaid on the sale of the property. Examples include a lifetime mortgage and a home reversion plan. Other equity release products such as a retirement interest-only mortgage do require you to make monthly payments. Second mortgages are no different to standard mortgages, where you will need to commit to monthly payments over the term of the loan.

    What protection is available when taking a second charge mortgage?

    Since 2016, these products have been regulated by the Financial Conduct Authority (FCA) which means lenders offering second-charge mortgages must do affordability checks as part of the loan application process.

    In addition, the rules state that lenders must provide the following information to borrowers seeking to take out a second mortgage:

    • an explanation of a product’s essential features,
    • issue a binding offer,
    • a seven-day cooling-off period,
    • and give customers a European Standardised Information Sheet (ESIS) disclosure document.

    How can Simmonds Mortgage Services help you?

    With access to a wide range of lenders, Simmonds Mortgage Services can review your circumstances and advise on the best approach. Second-charge mortgages are sometimes offered by high-street lenders, but you may find better deals with specialist lenders. We can search the market for you. Call us on 01184 693037 for a no-obligation chat today.

    Frequently asked questions about second charge loans and mortgages

    Do second mortgages affect your credit score?

    A second-charge mortgage might temporarily affect your credit score, but if you make payments on time, your credit score will improve. If your credit rating is poor, it can be easier to get a second-charge loan than it might be to get a re-mortgage as long as you pass the lender’s affordability checks.

    Do second charge mortgages have high arrangement fees?

    Arrangement fees can be more expensive than standard mortgages which reflects the increased risk taken by the lender.

    What is the loan to value (LTV) on a second mortgage?

    The loan to value will be based on individual lenders and your personal circumstances. The amount you can borrow will depend on how much equity you have in your property. Some lenders make offers of up to 100% LTV of your equity value (difference between market value and outstanding mortgage balance).

    Can you sell a house with a second charge?

    Yes, but you must either pay off both outstanding mortgages or agree with your lender to transfer the second mortgage to the new property.

    Can a lender refuse a second charge?

    Yes, a lender can refuse to offer second-charge mortgages to borrowers who don’t fit their specific criteria.

    Do you need a deposit for a second charge mortgage?

    No, you do not require a deposit for a second charge mortgage.

    Can self-employed borrowers get a second mortgage?

    Yes, it’s possible. Talk to Simmonds Mortgage Services to find the best deal for you.

    Andrew Simmonds

    Andrew Simmonds

    Andrew Simmonds is the managing director at Simmonds Mortgage Services. He's been providing mortgage advice to home owners for many years.

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