What Is a Second Charge Loan or Mortgage?
You’ll find the concept of the second charge explained in relentless detail by countless financial specialists online. Nevertheless, finding a definition that’s not disastrously over-complicated is something else entirely.
So for those who’ve been wondering what second charge loans and mortgages are all about, you’ll find a concise overview and explanation detailed below:
What Is a Second Charge Loan?
A second charge loan – aka second charge mortgage – provides homeowners with the opportunity to raise capital by using their property as security. An alternative to a personal loan or remortgage, a second charge loan is simply a second mortgage taken out alongside a primary mortgage.
Remortgaging is different, in that a remortgage deal enables the borrowers to pay off their prime remortgage in full, switch to a new mortgage deal (often with a new lender) and continue to pay one mortgage as before. The benefit typically is lower monthly repayments, or lower overall borrowing costs. Remortgaging is also an option for raising extra cash to fund property development works, extensions, renovations and so on.
While there are similarities between the two, second charge mortgages are not exactly the same as remortgage products. Primarily, a remortgage deal simply converts your current mortgage into a different type of mortgage, while taking out a second charge mortgage means having two separate mortgages secured on your home.
The two products also differ by way of eligibility. When taking out an initial mortgage or remortgaging a property, eligibility is determined by the applicant’s credit rating, proof of income, financial status and often the size of the deposit they can pull together. With a second charge mortgage, applications are typically scrutinised exclusively on the borrower’s equity. Or in other words, the value tied up in their home.
It may still be necessary to provide evidence of your ability to repay the loan as agreed, but credit checks and extensive financial background checks are usually unnecessary.
It’s important to be aware of the fact that ‘equity’ in this instance refers to how much of the borrower’s property they own outright at the time of the application. In a working example, the applicant has a £300,000 mortgage on their current property and has so far repaid £125,000. This would mean they have £125,000 equity, which could be used to secure a second charge mortgage.
Again, in accordance with general eligibility.
What’s particularly useful about a second charge mortgage is that loans are often available from as little as £1,000. Hence, there’s no requirement to borrow more than you need if looking to tackle a relatively minor project.
Should I Apply for a Second Charge Mortgage?
A second charge mortgage is one example of countless secured loans available for homeowners. Even if you are perfectly eligible for a second charge mortgage, it may be useful to first consider the alternative options available.
For example, while it’s possible to borrow as little as £1,000 by way of a second charge mortgage, an unsecured personal loan could be more affordable for any sum lower than £10,000. Likewise, if you plan to fund a short-term project and will have the means to repay the loan balance within a matter of months, you could save time and money with a bridging loan.
Particularly where poor-credit applications are concerned, it’s worth comparing all available options both on and off the UK High Street. Compare the market in full under the supervision of an independent broker, in order to see which secured (and unsecured) products best suit your needs.