Homeowners who already have a mortgage can borrow money against the equity in their home through a second charge mortgage. Although the interest rates on these mortgages are typically higher than those on standard mortgages, the money can be used for a variety of purposes other than just purchasing real estate.
A second charge mortgage may offer a way to obtain another loan secured against your property if you already have a mortgage on your house but need to borrow extra money.
Although taking out what is essentially a second mortgage in this way does carry some risk, it may be an option if you don’t want to remortgage or are having trouble getting a personal loan.
Below we explain more about how second charge mortgages work and when you might want to consider a second mortgage as a borrowing option.
Full guide to second charge mortgages
A second charge mortgage is a type of loan that can be secured against your home alongside an outstanding mortgage that you’re still paying.
The equity you own in the house acts as security for the loan and will help determine how much you’re allowed to borrow.
Perhaps confusingly, you might also find second charge mortgages called homeowner loans, second mortgages and secured loans too.
What exactly is a secured loan?
What’s the difference between a first and second charge mortgage?
A first charge mortgage is the primary loan against your property, and will typically be the standard mortgage that you use to help you buy a house.
By contrast, a second charge mortgage is an additional loan secured on your property arranged through a different lender to the one behind your original mortgage. It is completely separate from your existing mortgage and, unlike with a first charge mortgage, the money raised can be used for purposes other than buying a property.
In other words, you could have both your normal mortgage (the first charge mortgage) and a second charge mortgage from another lender on one property.
The Way second charge mortgages work?
Second charge mortgages work in much the same way as a traditional mortgage. You can borrow a set amount over a specified term, which could be as long as 30 years, and you make monthly repayments towards paying off that loan.
This type of borrowing carries significant risk for borrowers. As it is secured against your house, if you fall behind on your repayments, the lender could repossess your property to recover the money they are owed.
If the worst does happen and your property needs to be sold for the lender to recover their money, your main mortgage provider will have priority for the repayment of its loan over your second charge mortgage provider.
If you don’t have enough equity in your property to pay off both loans, your second charge mortgage provider may take you to court to recover the amount still owed.
However, right because the second charge lender can only collect payment after the standard mortgage (first charge) loan is settled, interest rates on second charge mortgages tend to be higher as they come with more risk to the lender.