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Second Mortgages

As much as homeowners carefully plan their budgets, sometimes life can present unexpected obstacles.

If you have seen a large increase in your expenses lately, and you are looking for a way to get back in control of your household expenditure, you could look into getting a second mortgage.

Read on to find out more about how second mortgages work and how they may help homeowners.

What is a Second Mortgage?

A second mortgage is a secured loan where the borrower’s home is used as security. They are for those who have a pre-existing mortgage and are looking to borrow more money against their home. Second mortgages are different to remortgaging, in that you are not replacing one mortgage product with another, you are simply taking out an additional loan. These are also commonly known as ‘homeowner loans’.

Please note: A second mortgage is not the same as a separate mortgage taken out to buy a second home. It refers to the amount of mortgage secured on just a single property.

Am I Eligible for a Second Mortgage?

• In order to take out a second mortgage, you will need a first charge mortgage and a property to use as security.
• You want to borrow over £1000. In many instances, there is no upper limit on the amount you can borrow in a second mortgage.
• You will need to pass the lender’s affordability checks, which may be more of a challenge if you are using a second mortgage to eliminate your debts. It may be wise to find a mortgage lender who uses underwriters to assess creditworthiness, as they can take difficult financial circumstances into account and give your case for borrowing a fairer hearing.

How is the Second Mortgage Repaid?

If you are taking out a second mortgage and looking to sell your property, the proceeds from the sale will firstly go to paying off the first mortgage. When that is paid off, the leftover funds will go towards paying off your second mortgage. If you have any loan outstanding on your second mortgage, you will need to arrange to move it to a new mortgage.

When it comes to repayment methods with a secured loan, many lenders offer both fixed and variable interest rates, as well as repayment and interest only products.

Take a look at our Guide to Mortgage Types for more information on mortgage repayment methods.

 If you are looking to put a second charge on your property, and you intend to live in there until the mortgage is paid off, then you may appreciate the assurance of a fixed interest rate. On the other hand, you might look to sell in a few years, then a variable rate of interest on your second mortgage may allow you to make smaller monthly payments some of the time. Of course, you must plan for rates to rise above expected when you are planning your new household budget.

What are the Benefits of a Second Mortgage?

• Higher lending - You can borrow more money with a homeowner loan than you can with an unsecured loan. This is because your home offers lenders more reassurance, that if you cannot afford to pay off your second mortgage, they can repossess the property you put down as security, in order to make their money back.
• Longer repayment terms-  You are given more time to pay back your secured loan, when compared with the length of unsecured loan terms. For example, you can pay off a second mortgage over the space of 20 years, whereas the maximum term for most unsecured loans is generally 10 years.
• Lower Interest Rates -Interest rates on second mortgages tend to be lower than rates found on unsecured loans. However, you will need to shop around to find the deal that’s right for you. The interest rate you pay for a second mortgage will be dependent on the amount of equity in your home (equity is the difference between your home’s value and the amount you have outstanding on your mortgage). The length of the mortgage term, as well as your credit score, will also influence the rate of interest you will pay on a secured, homeowner loan.
• Consolidate Debts – Life can get in the way of the best financial plans. If you have missed a few payments on your credit cards, or lost your job and fallen into difficulties, consolidating your debts into one manageable, monthly payment may give you peace of mind and a clear route out of financial hardship.

Take a look at our Guide to Mortgage Arrears if you are facing difficulties in paying off your mortgage.

• Home Improvement Funds – You can use a second mortgage to add value to your home. For example, a secured loan could help you fund a loft conversion, so that when you come to sell your property, you will have added an extra room and thus, extra property value.

What are the Pitfalls of Taking out a Second Mortgage?

• Your home is at Risk – By taking out a second mortgage, you are putting your home more at risk of repossession, if you cannot keep up the repayments. Those considering a second mortgage should consider the affordability of it very carefully before proceeding.
• Loan to Value Decrease – For those taking out an interest only second mortgage, there is the danger that your home may decrease in value and therefore the amount of mortgage you owe is worth less than the property itself. This is known as negative equity.
• More Interest Paid in Long-Term – When you are borrowing more money against your home, it takes longer to pay off the money owed. While the interest on your mortgage payments may be low, the length of your mortgage will increase by years. This means that you will paying more in interest, in the long-run.
• Less Flexibility – Second mortgages tend to have less payment flexibility and early redemption fees attached if you wish to pay it off early.

Let’s Look at an Example;

John and Claire took out a £300,000 mortgage and they currently have three years left on their fixed term deal. Within the last two years, the value of their home has increased. In order for them to leave their mortgage deal early, they will have to pay an early redemption charge of 5% of the mortgage’s value (so, £15,000).

They would like to borrow £25,000 in order to convert their loft into a new bedroom, to add even more value to their home.

If they chose to remortgage, they would have to pay £15,000 to exit the current deal and there is no guarantee they would get a good interest rate, in comparison to the deal they already have. If they choose to take out a second mortgage, however, the interest rate on this second charge will be higher, but they will have to pay far less than £15,000 to process the application.

John and Claire opted for a second mortgage with a fixed term of three years. When this period ends, in conjunction with their first mortgage, they can look again at remortgaging options.  

What are the Alternatives to Second Mortgages?

• Increasing your mortgage – This is known as a ‘further advance’ on a mortgage, and it is where you apply with your existing lender to increase the existing loan amount. You will have needed to have built up some equity first, and you will most likely be put on a new interest rate. Extra charges for processing fees may also be payable.
• Remortgaging for a higher loan – You can also choose to switch lenders, which may incur early redemption charges, plus extra mortgage arrangement fees. You could then increase the amount you borrow as a mortgage (provided you pass the new lender’s affordability checks).
• Unsecured Loans – If you are seeking money for any other than debt consolidation or looking to borrow a relatively small amount (say, under £10,000) then it may be worth looking into unsecured loans instead. These are not secured against your home; however, these tend to come with higher interest rates than homeowner loans.

If you are struggling to make your mortgage payments or want to borrow more money against your property to make home improvements, proper financial planning is crucial. Get in touch with an independent mortgage advisor as your first step. They can offer you a free quote and advice on mortgages.