Guide to Borrowing

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.

£300,000 Property

-£100,000 Mortgage

=£200,000 Equity

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)

Why use a 2nd mortgage

The market for 2nd charge lending has changed quite remarkably in recent years. The biggest and most attractive change is the fact that interest rates have fallen to the point where they are becoming competitive with 1st charge rates.

Often 2nd charge loans are taken when a homeowner, for various reasons, cannot approach their 1st charge lender for further funds. A good example is when the 1st mortgage ties you in on a fixed rate for a fixed number of years. This may mean that you cannot amend this loan without incurring a punitive charge.

Another reason can be a change in your own circumstances, if you have recently become self-employed perhaps, or maybe your credit rating has fallen, these can both be reasons for your existing lender to decline your loan application, a 2nd charge lender may have more flexible criteria.

Debt consolidation is another common reason to use a 2nd charge. If you have accumulated various credit card and other expensive unsecured debts you can consolidate them into one loan at far lower interest rates. In the short term this can reduce your monthly outgoings and make life a lot easier if you are struggling to make ends meet. Effectively you are replacing short term debt with long term debt, please remember that you might be paying a lower rate of interest, but over the longer term you might end up paying back more in interest.

Am I getting the best rate?

All lenders are biased towards their own product, they will always tell you that their loan is the best one for you, there is no requirement for them to offer the best rate available. This is the main reason for using a broker or packager of loans. You are the client and it is our brief and requirement to find you the most suitable and cost effective loan available to you.

Is it all good news?

No, of course not. A 2nd mortgage is a serious commitment and should be approached cautiously. Ultimately you are risking the ownership of your property. If you fail to make the repayments you agree to the property can be repossessed and sold to clear your debts. Even then, if there is not enough equity in the property to repay both 1st and 2nd charges in full, you could remain in debt.