What is a second charge mortgage and why is it used?

There are times when unplanned yet large expenses arise in life. A stolen car, the need to adapt a house to accommodate limited mobility after a traffic accident or an offer to buy a valuable item at a bargain price can result in the need to raise a lot of cash fairly quickly. While the UK lending market is doing well and many Islanders have a credit card, there are ways to raise funds more cheaply. One of these is the second charge mortgage, which we will look at in this article.

What is a second charge mortgage?

A second charge mortgage is actually a mortgage loan that is secured by the property you live in and are still paying off. The security is therefore the part of the house that has already been paid off. (Source: Money supermarket)

Why should I consider a second-charge mortgage?

It has not been known for a long time that mortgages are basically the cheapest form of borrowing money. This is primarily due to the bank’s very high level of security - the commitment is secured by the property, the loan to value (LTV) ratio does not exceed 95% and the borrower often has life or critical illness insurance. In practice, it is very rare for a bank to lose out on a loan, so such institutions can offer relatively low interest rates, not much higher than the rate at which they borrow money from each other and the Bank of England.

A second-charge mortgage is therefore a relatively cheap form of financing. Although we wrote in the article about the UK home extension loan that additional funds can be obtained by refinancing, it is worth remembering that such a decision will not always be profitable. Take into account the fact that just two years ago, interest rates were much lower, making it simply unprofitable to swap your current loan for another one.

UK home equity mortgage - how much can I borrow?

The vast majority of banks in the UK require that the ratio of the value of the liability to the value of the security does not exceed 95%. This means that for every £950 borrowed, there must be a minimum of £1,000 of the value of your home.

To calculate the estimated amount you can get from your bank in a UK home equity mortgage, you need to consider 3 factors:

• Your affordability, which is the amount of monthly instalments the bank thinks you can pay;

• The capital you have already paid back in the form of a mortgage;

• The current value of your property.

When property prices in the UK rise, the proportion of your mortgage relative to the value of its security falls - even if the balance of your mortgage didn’t change, you would be able to borrow some money in a second charge mortgage. On the other hand, you could find yourself in what is known as negative equity, a condition where the value of your mortgage exceeds the value of your home. This is obviously a very dangerous phenomenon, but it was quite popular during the great banking crisis of 2008-2009.

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Is it worth taking out a property mortgage in the UK? Advantages and disadvantages

Let us now turn to the answer to the question you have probably been asking yourself since you started reading this article. Is it worth taking out a second-charge mortgage?

You probably won’t be surprised if we say that it depends. Let’s first consider the advantages of this solution:

Advantages

• A second charge mortgage allows you to keep the existing terms of your main mortgage agreement, which can translate into big savings;

• A second charge mortgage allows you to avoid early termination penalties, which could occur if you were to remortgage;

• Getting a second charge mortgage for a larger amount can be easier than getting a large mortgage, especially if you are self-employed.

Disadvantages

• Defaulting on the instalments of a second charge mortgage can lead to the foreclosure of your home, exactly as is the case with a mortgage for the purchase of a property;

• By taking on a new commitment, a possible remortgage in the coming years will not generate as much of a difference in the interest rate of your mortgage, as you will automatically raise the LTV ratio of your commitments;

• The interest rates on second charge mortgages are not as favourable as standard fixed-rate products.

Summary

We hope you found our article on the property mortgage loan helpful. Although it is not a common product in our market, it is certainly possible to benefit greatly from using it and, in addition, it can protect you from the deterioration of your credit agreement for a while. Who knows, maybe it is a better way of financing a car than leasing, for example? That is something you will have to judge for yourself. However, we would like to invite you now for a free, no-obligation consultation, during which one of our advisors will answer all your questions and help you choose the right product