What is a second charge mortgage and how do they work?

Even if you are still paying off your mortgage, you may be able to take out a second mortgage on your property to access extra cash.

It could be a way to fund a big expense, like home improvements, or you could use the money to pay off other debts.

What is a second-charge mortgage?

A second-charge mortgage is a type of secured loan you can take out if you already have a mortgage on your property. Loans are usually available from £1,000.

It’s not a ‘top-up’ from your existing lender; it’s a new loan with a different lender.

Although you do need to own property to take out a second-charge mortgage, you don’t necessarily have to be living in it permanently.

This means you could take out a second-charge mortgage on a rental property, for example.

However, unlike the loan you used to buy your home, you can spend the money raised through a second-charge mortgage however you choose.

How does a second-charge mortgage work?

When you apply for a second-charge mortgage, the lender runs an affordability check to ensure you can make the monthly payments on your current mortgage and the second one. 

They will look at your credit score and your income and outgoings.

If you plan to use your second-charge mortgage to consolidate debt, they will also consider the debts you want to clear.

What about rates and lenders? 

Second-charge mortgages tend to be cheaper than personal loans because they are secured to your property. 

However, interest rates will still be higher than first mortgages.

This is because they represent a higher risk for lenders. If your property were repossessed, for example, the first lender would be paid before the second, which means there’s a higher chance they won’t get their money back.

As with first mortgages, though, second-charge mortgage rates vary widely – typically between 3% and 12%.

How much you pay will depend on a range of factors including your credit history and income, as well as your existing mortgage and the amount you want to borrow.

To get the cheapest rates, you must have an excellent credit history, and your overall loan-to-value (LTV) should remain low - ensuring you still have plenty of equity in the property. 

You can research second-charge mortgages using comparison websites or talk to a mortgage broker, who can identify the most suitable option.

What happens if you have a second-charge mortgage and want to move?

There are two options if you decide to sell your home when you have a first and second-charge mortgage.

If your mortgages are ‘portable’, you can switch them to your new home and keep paying your current lenders. 

Alternatively, you could repay both loans when you sell your property and take out a single mortgage on your new house. 

How feasible this is will depend on the conditions of both mortgages and any early repayment charges that may apply.

A mortgage adviser can talk you through your options.

The pros and cons of a second-charge mortgage 

A second-charge mortgage could be a good option if: 

• You want to keep your existing first mortgage.
• Switching mortgages will trigger an early repayment charge.
• Your credit rating has slipped since you took out your first mortgage, making alternative methods of borrowing too expensive. With a second-charge mortgage, you will only pay the higher rate on the additional amount you’re borrowing, not the full value of both mortgages.

But it’s important to consider the potential disadvantages: 

• Your home is at risk if you can’t keep up with repayments. 

• Missed or late payments may impact your credit rating and make it harder to borrow in the future.
• If you want to use your second-charge mortgage to consolidate debt, your repayments may be more affordable, but you could pay more interest overall.
• There will be fees and extra costs when you take out a second-charge mortgage.
• Some second-charge mortgages have long repayment periods, so you could still be repaying it in retirement.

How do you apply for a second charge mortgage? 

High street lenders don’t always offer second-charge mortgages, so it’s a good idea to discuss your options with a specialist mortgage adviser.

Once you’ve found a lender and are ready to apply, you’ll need to supply financial information, including your payslips, recent statements and latest mortgage statement.

You’ll also need proof of your identity and address.  

Before your second-charge mortgage can proceed, you will need an agreement in writing from your first-charge mortgage lender; this is known as the deed of consent.

You also might need a valuation and conveyancing solicitor. 

A second-charge mortgage can be a cost-effective way to pay for home improvements, settle a major bill or consolidate debt. 

But make sure you’re comfortable handling two monthly repayments and that the term of your mortgage doesn’t compromise your long-term or retirement plans.

Need help finding the right mortgage?

If you’re considering a second-charge mortgage, remortgaging or buying your first home, a mortgage broker can help.

Unbiased can quickly match you with a qualified mortgage broker who can find the best mortgage based on your unique circumstances and future goals.