What happens when you need money for completing home renovation? Unlike first charge mortgages that you use at the time of home purchase, a second charge mortgage is used for expenses that you need to cover later in time.

A second charge mortgage is a type of mortgage that you borrow against your asset. This means that this loan is secured against the value of your home. So, if you own a home, you can opt for a second mortgage.

In order to find out more about second charge mortgage and how it works, continue reading:

What You Need to know Before Applying for a Second Mortgage?

Second charge mortgages only work when you have built up equity in your home. The equity in your home is calculated by subtracting first charge mortgage from the current value of the home.

Used for Big Purchases

With equity in hand, you can opt for a second charge mortgage easily. Second mortgages are most common amongst homeowners for making big purchases. These purchases could go into home renovations, extensive repairs, and more.

Flexible Loans

Second mortgages are easier to get. These mortgages can be approved for a number of purchases. You can borrow a second charge mortgage for as long as thirty years. It is due to their flexibility that these loans are chosen by many homeowners. Most secured loans are generally easier to get since they are protected by collateral in the form of an asset. Since you keep your home’s equity as collateral against the loan, lenders approve the loan easily.

Riskier Loans

A second charge mortgage is a risky loan because it is backed by your home’s equity. This means that if you fail to repay the loan in time, you might end up losing your home. Therefore, it is important to understand the risk associated with a second charge mortgage before you opt for it.

It’s not like a Home Equity Loan

Many people mistake second charge mortgages with home equity loans. The two are very similar, but they differ in terms of the collateral put against the loan. A second mortgage keeps your entire home’s equity as collateral whereas a home equity loan is based on the assets you own in your home. This means that a home equity loan doesn’t take your home’s equity as a security against the loan. This makes a home equity loan less risky and a second charge mortgage much riskier.

Subordinate Loans with Higher Interest

A second charge mortgage is listed as a subordinate loan and subordinate loans are not considered as the primary lien on your asset. So, if you are unable to pay off any of your mortgages, it will be your primary lien holder (first charge mortgage lender) who will be paid off from the collateral.

When you get a second charge mortgage, your lender keeps your home equity as collateral against the loan. However, in case of bankruptcy, it is not the second charge lender that will get paid off first. This makes second charge mortgages interest rates reach new heights, making it hard for the borrower to repay it.

Foreclosed Property if you Default

Although a second charge mortgage offers lots of help to homeowners, they can be a nightmare if you default on the payment. Many homeowners mistake second charge mortgages as their saviours from foreclosures if they default on their primary mortgage, but that’s farthest from the truth. The fact about second mortgages is that they can lead to a foreclosure in the same manner as your primary mortgage.

Many times a subordinate lender can buy your primary debt from the lender and get hold of your home. This way, a second mortgage lender can pull you into a foreclosure before you know it. This makes second charge mortgages quite risky. So, if you are taking a second charge mortgage thinking that it would save you from foreclosure, you are sadly mistaken.

How to get a Second Charge Mortgage?

A second charge mortgage provides lots of opportunities to homeowners who are looking to make big purchases. However, just like all other types of loans, there are certain things you must take care of before applying for one. In order to increase your chances of getting a second charge mortgage, you need to keep the following factors in mind:

Credit Report Holds Importance

Before heading to a lender to get a second charge mortgage, make sure you get your credit score checked. You can get a copy of your credit report from one of the three credit bureaus. It is also good to check your credit report at least once a year to ensure there are no errors or mistakes in the entries. Any error in the report can impact your eligibility for any type of loan.

It is also wise to check your report before getting in touch with a lender to ensure that the report is perfect. If your credit report shows that you default on your payments and don’t pay bills on time, it will result in disapproval of the loan from the lender.

No one wants to give money to someone who is not responsible and cannot afford to pay back the borrowed amount. Therefore, lenders will check your credit report before approving the loan to feel a sense of security that their money is safe and will be returned to them in time.

Improve Your Credit Score

It is important that you have a good credit score if you’re applying for a second charge mortgage. Once you have requested a copy of your credit report from one of the credit bureaus’, it is time to find errors and problems. In order to make your report look good, you will need at least three months. Start paying bills on time and make sure you stay well under your credit limit to turn your credit report around.

Sometimes a credit rescore company helps fix your credit score and increase your chances of getting a loan. A credit rescore company will get in touch with the credit bureaus to resolve the issues in your report and speed up the process of credit score recovery so you can apply for a second mortgage.

Such companies do things lawfully by assessing your credit report and identifying issues that need to be resolved. Once the report has been assessed, the company will give you tips to resolve the issues and make the report look good.

Consider Closing Costs

When it comes to mortgages, not every lender offers the same closing costs. This means that when you are mortgage shopping, it is important to compare closing costs of different lenders to ensure you are getting the best deal. By comparing closing costs, you will be able to make a better decision to go with a lender. Therefore, request closing costs from every lender that you meet and when they give you the quote, compare it with others and make a final decision.

Compare Lenders

One of the worst mistakes that homeowners do is meeting with one lender and borrowing money from them without comparing their rates to others. Every lender has a different strategy so their rates also differ. Therefore, it is best to meet different lenders and request quotes. Once you have information from all the lenders, compare and choose the best. Lenders apply interest rates based on their desire. Some have high interest rates while some have low rates. Finding what’s best for you and saves you money should be your first priority.

Negotiate Better Rates

Before you finalise a deal, it is important that you try your luck for better rates. When you finally decide which lender to go with, try to negotiate better rates. Ask the lender for lower interest so you can minimise your final cost of the loan.

Pros and Cons of Second Charge Mortgage

Every loan has its fair share of advantages and disadvantages. If you’re planning on getting a second charge mortgage, you must first list down the pros and cons to ensure that getting the mortgage is worthwhile.

A second charge mortgage loan, also known as a second mortgage, is a financial product that allows homeowners to secure additional funds using their property as collateral. The main advantage of a second charge mortgage loan is that it provides access to a significant amount of money, enabling borrowers to finance various expenses such as home improvements, debt consolidation, or education costs. Moreover, this type of loan often has more flexible eligibility criteria, making it accessible to individuals with lower credit scores or less stable financial backgrounds.

However, there are also potential drawbacks to consider. One of the cons of a second charge mortgage loan is the higher interest rates compared to primary mortgages, which can result in increased overall borrowing costs. Additionally, taking out a second charge mortgage loan places an additional burden on the borrower’s property, potentially limiting future options, such as remortgaging or selling the house. Therefore, it is crucial for homeowners to carefully evaluate the pros and cons of a second charge mortgage loan before making a decision.

Pros

·         Tax Benefits

When you get a second charge mortgage, get in touch with your tax lawyer. Second charge mortgages often help borrowers get a deduction against the interest paid. However, finding about the deductions is quite technical and in order to understand it best, you must get in touch with a tax professional who can help you figure it out.

·         Borrow Lager Loan Amount

The biggest benefit of a second charge mortgage is that t allows homeowners to borrow a large sum of money. The reason this type of loan lets you borrow more money is that it is secured against your home’s equity, which costs a lot of money. In most cases, you can borrow up to 80% of your home’s value in a second charge mortgage. So, if you have a big home renovation planned, a second charge mortgage will be the right option to choose.

·        Lower Interest Rates

If you compare second mortgages to other types of loans, they have lower interest rates. Since you secure the loan against your home, you get to enjoy lower interest rates.

Cons

·         Increased Costs

Before you apply for a second charge mortgage, make sure you know how much it costs. There are numerous payments and bills that you have to pay when you get a second charge mortgage including origination fees, credit checks, appraisals, and more. So, opt for this loan only if you are willing to pay all those costs.

·         Risky Loan

Getting a second charge mortgage is a risky business since the loan is secured against your home’s equity. This means that if you fail to make the payments, you might end up losing your home. you have to put your home at risk when getting a second charge mortgage. Foreclosures are common with second charge mortgages. If you default on the payment, the lender has a right to put your home on the foreclosure list. If you lose your home, you and your family might end up in big trouble.

Therefore, unless it’s very important, avoid taking a second charge mortgage. Do not take out this loan for entertainment purposes because if you fail to make the payments, you will lose all you have.

·         Interest Rates Go Up

Although the interests you pay on your second charge mortgage are lower than most types of loans, they are still higher than your first charge mortgage. Because second mortgage lenders are taking a big risk by letting you borrow a large sum of money, they need to ensure they are getting paid the right way.

Common Uses of Second Charge Mortgages

If you are confused what second charge mortgages are used for, take a look below:

Home Improvements

One of the most common reasons to borrow a second charge mortgage is home improvements. Because home improvement cost a lot of money, a second mortgage can help cover the costs.

Education

If you need money to pay your children’s school or college, a second mortgage is a good option to choose. But before you opt for it, make sure you weigh the pros and cons. You must also consider if the loan is worth putting your home at risk of foreclosure.

Private Mortgage Insurance

You can avoid private mortgage insurance by opting for a second mortgage. However, ask yourself; is it worth it or not?

Second charge mortgages can be borrowed from banks, private lenders, and online lenders. It is important that you first get in touch with different lenders and choose the one offering the best rates. Online lenders are often cheaper than banks and private lenders. When you look up for second charge lenders online, you will get more variety and options to compare.

A second charge mortgage is useful if you are certain you can pay it back without losing your home.

FAQ’s

What Is A Second Charge Mortgage

A second charge mortgage refers to a type of loan secured against a property that already has an existing mortgage. This secondary mortgage allows homeowners to borrow additional funds while keeping their first mortgage intact. It is often used when individuals require a significant amount of money for purposes such as home improvements, debt consolidation, or funding other large expenses.

Unlike a remortgage, which replaces the original mortgage, a second charge mortgage allows borrowers to access equity in their property without affecting the terms or interest rate of their initial loan. This financial product provides an alternative borrowing option for homeowners who may not be eligible for a personal loan or wish to avoid remortgaging.

What Are The Benefits Of A Second Charge Mortgage

A second charge mortgage, also known as a second mortgage, is a financial arrangement that allows homeowners to borrow money against the equity they have built up in their property. The main benefit of a second charge mortgage is that it provides individuals with access to additional funds without the need to remortgage their entire property.

This can be particularly advantageous for those who are unable to secure a personal loan or would prefer not to disrupt their existing mortgage agreement. By opting for a second charge mortgage, borrowers can use the borrowed funds for various purposes, such as home improvements, debt consolidation, or purchasing a second property. Additionally, the interest rates on second charge mortgages may be more favorable than other forms of borrowing, making it a cost-effective solution for homeowners in need of extra financing.