Borrower’s turning to second charges

Borrower’s turning to second charges

With tougher lending rules now in force, more homeowners are turning to a “second charge” loan to fund home improvements, such as extensions, or consolidate debt. Industry figures show a 27.5% rise in the sums borrowed this way in the six months to the end of December 2017.

The rise in second charge borrowing (secured loan) – so called because the lender is second in line for repayment behind the main mortgage provider if a borrower’s home is repossessed – has been fuelled by rising house prices and the squeeze on household budgets. As homeowners become more aware of this form of lending and its flexibility so the figures have increased.

Homeowners should be aware this type of loan will NOT suit everybody, and it is highly recommended to seek professional advice. 

What’s the attraction of a second charge?

Mortgage rules have become stricter in the past couple of years, with lenders applying tougher “stress tests” to make sure borrowers can meet repayments if interest rates rise. So you may not be able to secure extra funds from your original lender. Some lenders consider certain borrowers too old or too risky to increase their lending.

Some borrowers also prefer to leave an existing mortgage in place because they would lose an attractive interest rate if they re-mortgaged, or there might be a steep exit penalty for switching. By taking out a second charge loan with a new provider, the first mortgage is unaffected, but you need to tell the original lender. You must have enough equity in your home to cover it.

A second charge loan may suit borrowers who have had payment problems, for example, due to job loss or illness. These homeowners are often refused an increase on their first mortgage, but a specialist second charge lender may take a different view.

Also, importantly more can be borrowed with a loan secured on a home than with an unsecured loan. Personal loans from high street banks are usually limited to £25,000.

Like to know more

A second charge loan will not suit everybody so it’s very important to get professional advice. We have qualified advisers waiting to help so please do make contact.