What is a 2nd Charge?
Any loan that uses your property as security is referred to as a mortgage, the original mortgage that is used to purchase your home is referred to as the 1st charge. A 2nd charge or 2nd mortgage is simply an additional loan that is also secured against your property.
In law the 1st charge takes priority over the 2nd charge should you sell the property for any reason, therefore the 2nd charge carries a slightly higher risk of default which is reflected in the cost.
Simply put if you take a 2nd charge against your property you will have two mortgages.
What are the qualifying criteria?
The main criteria is the need for you to be a homeowner. All mortgages use the equity that you have in a property as the security to lend against. To qualify for a 2nd charge you must already have a 1st charge in place, but you must also have equity in your property, the total borrowing that you will be able to secure against your property is equal to 80% including both 1st and 2nd charges.
If you own a property but are fortunate enough to have no mortgage you do not qualify for 2nd charge lending. The good news is that you will be able to raise finance using a 1st charge product.
Income or the ability to repay the monthly commitment is also essential. No responsible lender will provide you with finance if you cannot demonstrate the ability to meet the monthly repayments. Your current outgoings will be deducted from your income to determine affordability, often a lender will calculate.
It does not matter if you are employed or self-employed, the requirement is to be able to demonstrate this income in an adequate manner.
Do I have enough equity?
The value of your property minus the mortgage that you have secured against it equals the equity you own in your property.
If a lender will allow you to borrow up to 80% of the value of your property, using the example above, you could borrow a maximum of £240,000. Because the 1st charge is £100,000 the maximum amount you could borrow on a 2nd charge is £140,000 (subject to income and affordability)