A second charge mortgage is a loan borrowed against your home, on top of your existing mortgage. As the second charge is secured against your property, you need to have sufficient equity in your home to support the loan.
If you were ever to default on your repayments and have your home repossessed and sold, the ‘first charge’ mortgage lender would get their money back first, and the ‘second charge’ lender would be paid back after the mortgage and potentially other secured loans have been repaid.
As the second lender is taking a higher risk, second charge loans are usually charged at slightly higher interest rates than mortgages. But they are a great deal cheaper than unsecured personal loans that is for sure. So, it is obvious why you might choose a second charge over a personal unsecured loan. But why would you consider a second charge loan, rather than simply re-mortgaging and borrowing more on your first charge loan?
Second charge loan v re-mortgage 2 examples
1.You are paying a very low mortgage rate.
Thousands of mortgage borrowers in the UK are on very low lifetime tracker mortgages taken out pre-2008, paying less than 2%. If you are on one of these deals and you want to borrow, say £50,000 extra, your mortgage lender may offer you the extra cash but insist that you re-mortgage the whole deal onto a higher interest rate.
In this instance, it makes sense to keep your existing borrowing at the lower rate guaranteed for the life of your mortgage, and just borrow the extra £50,000 as a second charge at a higher rate.
- You need a quick turnaround.
It can take several weeks to organise a re-mortgage. If you require extra finance in a hurry, going for a second charge will be the quicker and cheaper option available to you.
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