The process of getting on the ladder of property is a major decision for many. However, once we’ve moved into the new house it’s normal to make improvements and changes that, in certain instances may cost quite much.
A very sought-after methods to finance home improvement is by taking out a second charge mortgage loan for your home.
This guide will take a closer review of second charge lending. It provides all the information you need to make an informed choice regarding whether this type of lending is the right one for you.
Is a mortgage second-charged?
The second charge mortgage a second amount of loan to a lender other than the one which you are a holder of your primary mortgage, in addition to the initial (or first charge) mortgage that you have put in place to finalize purchasing your house.
The second charge mortgage is a type of secured loans frequently referred to as homeowner loans. They are offered in the U.K for those who own the property and already has a mortgage.
A conventional mortgage is a secured loan that utilizes the property you’re buying as collateral for the loan. The term “charge” refers to the process of registering this loan on the title to the property.
If an event occurs that calls for a lender’s sale of the property and claim their loan, the first mortgage will prevail in the first charge.
Each mortgage is distinct from one another as separate credit lines. This is a key distinction between remortgaging, where any additional borrowing can be added on to the initial amount to create a brand bigger, new mortgage, rather than two mortgages.
What are they and how do they work?
Mortgages with second charges are considered as the primary option to remortgaging in order to obtain additional financing through the equity in a home that you already own and an existing mortgage.
The most important reason one might want to seek second charge financing is
Home improvements and renovations.
Consolidation of debt.
Capital requirement for emergency (family loan, etc.).
Second charge financing is available in both an interest-only and repayment basis. Loan amounts start starting as low as £1,000.
There is no need to choose an identical lender the second and a first mortgage. Therefore, you may choose to use different lenders offering different lending terms as well as rates for both.
A second charge mortgage secured loan that is secured by an asset that you own, but it doesn’t necessarily need to be your primary property. If you’re a landlord you could apply for an additional charge loan for the rental property you own in the event that you have equity.
Second charge lending guidelines
While the lending criteria for your initial mortgage is determined by various factors such as the amount of your deposit and affordability, credit score and so on. With second charge financing, the agreement is initially based on the equity in your home.
For instance in the case of a house worth 250,000 dollars and an outstanding mortgage amount of 100,000, you have equity in £150,000 that you can use to finance your purchase on an additional charge basis.
The more equity you possess within your house, the greater you are able to get. If there isn’t enough equity, your second-charge mortgage applications won’t be able to get off the ground.
Do I need to make arrangements for an appraisal of my property?
Yes. One of the most important aspects of the process to obtain the second charge mortgage will include a valuation of your property to assess accurately the amount of equity you have available.
Based on this data, a lender will be able to determine the amount you’ll have to borrow in accordance with their overall loan-to value (LTV) criteria.
If a lender’s maximum LTV equals 80%, in the scenario above, you can take out a loan up to £200,000 (80 percent of £250,000) which would mean you can borrow another £100,000.
The next steps to follow in this second mortgage procedure
After this is completed the lender will be able to consider other aspects before coming to the final decision. For instance:
The same affordability assessment and criteria are employed by lenders for second charge financing as they do for mortgages that are first, with both loan and repayments taken into consideration.
For instance If a lender applies an income multiplier that is 5 times salary they’ll base this on the sum of the amount of the amount of the first mortgage and second mortgage.
Similar principles apply to the lender’s affordability stress-testing. If there’s no evidence of sufficient disposable income to meet the payments for an additional charge mortgage in addition to your current commitments, they might not be able approve the loan.
It is also necessary to obtain permission or “consent to second charge” from your mortgage company. Some lenders are more inclined than others. If you’re considering taking out an additional charge mortgage, you must first contact the mortgage company first and ask them if they would be willing to accept the idea.
Can I obtain a second-charge mortgage even if I have poor credit?
It is certainly possible to obtain a second charge mortgage even if you’re not a creditworthy person. Because these loans can be secured by the property of the borrower, certain lenders might be more inclined to accept applying for this kind of loan if you have an unfavorable credit score as opposed to an unsecure personal loan since they have no recourse to recover cash in the case of default.
Advantages and disadvantages
There are many clear advantages to getting secured loans or a second charge mortgage, but there are some risk factors, which are detailed below:
The advantages Second charge mortgages offer
The major advantages of a second charge mortgage are:
It could be cheaper than the process of remortgaging.
Refraining from early repayment penalties on current mortgages.
Longer and better terms are available than loans that are not secured.
Flexible terms for self-employed.
Can help rebuild your credit record.
Of all the above advantages The most significant benefit of the second charge loan is its ability to borrow money by using equity in your home without altering the existing terms of your mortgage.
This is especially beneficial when you have a great rate on your mortgage but don’t want to breach these terms by remortgaging the loan.
Additionally, if you’re looking to raise funds quickly Second charge loans tend to be more convenient to establish as compared to other options due to the protection offered to prospective lenders.
More expensive repayments could cause your home to be in danger.
It could cost more in the long run.
Property values are falling, causing a slowdown in the property market.
When you put an additional charge on your property and increasing the amount you borrow it is a risk of putting additional pressure on your homeownership standing. It is possible to avoid this by ensuring that you are able to pay for any rise in your monthly financial obligations.
Is it possible to place an additional charge on commercial property?
Yes, and the be done in a similar way as a conventional second-charge mortgage however the interest rates could rise and affordable will be assessed differently.
Commercial mortgage lenders often make use of second charge loans for the following reasons…
Expansion of business
Renovation of the shop
Extension of a business premises
In lieu of remortgaging, it is an option to consider
How do I add a second charge to the property
Since access to this type of loan is through a reputable finance company and with the help of professional legal services and the responsibility for making a second charge on an asset and making sure that it’s registered properly usually falls with the respective entities.
If you’re looking for information on how to apply for (or eliminate) an additional charge on an item, HMRC can provide detailed instructions via their website.
Meet with an expert in second charge mortgages
Second charge loans may offer a desirable choice for both mortgages as well as secured loans as a method of obtaining financing by using equity in an existing property however, expert advice is advised before you make an application for one.
If you’re interested in finding out more about the process operates for second charge loans then contact us. We provide a no-cost broker-matching service that takes your requirements and needs into consideration and match you with the ideal secondary charge lender. This is the advisor we’ve carefully selected to match you with, based on their history of helping clients just like you!