What is a second charge mortgage?

An increasing number of UK residents are using second charge mortgages as a way to raise large sums of cash. But what exactly are second mortgages and how do they work?

Essentially a second mortgage is a subordinate mortgage of the already existing mortgage or loan and it is against the same property, not another property. Some people avail of them in order to sort out other debts, whereas others may use them to raise finance for improvements to their home or to buy another property.

Common Reasons to Use Second Mortgages

They can be used to pay off items such as university fees, or the cost of a wedding for example.

You need to make some improvements to an existing property, or maybe you need to have some repairs done.

You have a credit card and other unsecured loans which could be consolidated to make them easier to pay off.

You have decided to purchase a 2nd home either as a pure investment or for holiday use.

You wish to invest in big-ticket items such as a car, caravan, motorhome or motorbike etc.

Second Mortgages-How to They Work?

Before applying the foremost important consideration will be the amount of equity you have in your home. This and the amount left to pay on the current mortgage will be taken into consideration.

The rule of thumb is generally that a 2nd mortgage lender will offer to loan you 75% to 80% of the value of your property and this is then subtracted the existing outstanding mortgage amount.

Typical Term and Interest Rates of 2nd Mortgages

Anywhere between 3 and 25 years can be the typical term of second mortgages. However, be warned that the second mortgage interest rates will be higher than the existing mortgage. This is due to the fact that they lie in a higher risk category.

They are in a higher risk category because if you were to default on payments then the first mortgage lender would get their money before the second mortgage lender, and these can be two different entities.

Second mortgage interest rates depend on a variety of factors. The most important criteria are the lender’s assessment on the loan to value of the property and your existing credit rating.

However even taking this into account second mortgage interest rates will be lower than unsecured loans. This and other factors pertaining to your own situation can mean that second mortgages can be a viable and sensible financial solution under certain circumstances.

A second home loan ought not to be mistaken for a home refinance or re-mortgage. When you renegotiate your first home loan you are supplanting your old loan with another credit, normally at a better interest rate. A home equity loan or second mortgage is another loan notwithstanding the primary loan, which will result in two regularly scheduled instalments. It is vital to recognize the two to ensure that two instalments won’t truly affect your monthly spending plan.

Getting a second charge mortgage can be a decent method to utilize the value in your home to do any number of things.