What is the Difference Between a First and Second Charge Mortgage?

In order to understand how second-charge mortgages differ from first-charge mortgages, you need to consider the way home equity works.

For example, let’s say your home has a market value of £300,000 and you have £100,000 remaining on your original mortgage (your first-charge mortgage). You have built up £200,000 in equity in your home, i.e., the proportion of your home you own.

While continuing your monthly mortgage repayments as normal, you now have the option of taking out a second-charge mortgage (aka a second mortgage) against this equity. You may be able to borrow anything up to 85% LTV (loan to value) against your equity, meaning a maximum loan value of £170,000.

If you choose to do so, you will then have two mortgages secured against your home. Both require regular monthly repayments and carry the same risk of repossession if you fall into arrears.

What is the purpose of a second mortgage?

A second-charge mortgage can be a useful product for those who fall into the “asset-rich, cash-poor” bracket. Skyrocketing house prices have seen more UK homeowners than ever before become asset-rich over the past decade.

With the average UK house price now sitting at around £300,000, a second-charge mortgage can open the door to significant equity release at an affordable price.

Just a few of the most common reasons for taking out second mortgages include the following:

• Consolidating multiple debts to save money
• Funding for major home improvements and renovations
• Purchasing investment properties such as buy-to-let homes
• Helping family members get on the property ladder
• Buying cars and paying for holidays
• Funding new business start-up costs

With comparatively few restrictions, a second mortgage can be used for almost any legal purpose whatsoever.

What are the benefits of a second mortgage?

For those who are eligible for a second-charge mortgage, the main benefits are as follows:

1. The potential to access a significant amount of money at a low rate of interest, repaid over a series of affordable monthly repayments
2. A simpler and more cost-effective alternative to conventional equity release products with much greater flexibility
3. There are no restrictions placed on how the funds are allocated, and there is the option of early repayment with some second mortgage products.
4. Relaxed lending criteria, with loans available to applicants with poor credit and/or no formal proof of income.

Importantly, most second mortgage loans are bespoke financial products, tailored to meet the unique requirements of each applicant.

What are the drawbacks of a second mortgage?

On the downside, some of the potential disadvantages of second mortgage products are as follows:

1. Interest rates vary significantly from one lender to the next, and additional costs may apply: arrangement fees, valuation fees, administration fees, broker fees, and so on.
2. After taking out a second mortgage, you will have two mortgages secured against your home and will need to make two regular mortgage payments.
3. Affordable second-charge mortgage products can be more difficult to access for those with poor credit, a history of bankruptcy, or self-employed status.
4. If your home decreases in value and you are forced to sell it to repay your mortgages, the funds raised may not be sufficient to cover the full outstanding balance.

It is therefore essential to discuss all the potential pros and cons with your provider before applying for a secured loan.

How do you get a second mortgage?

Second-charge mortgages are available from a wide variety of major banks and specialist lenders. However, it is essential to apply exclusively to providers that are authorised and regulated by the Financial Conduct Authority (FCA).

The application process itself can be surprisingly straightforward, as the loan is technically issued against your equity, not the property itself. With all the essential paperwork and documentation in place, a second mortgage can be organised and accessed within a couple of weeks.

During this, you will be expected to provide evidence of your financial position, your employment status, your income level, any other major debts you are currently repaying, and so on.

Delays and disruptions may occur along the way, so it is advisable to get your application underway as soon as possible.