Second charge mortgages offer homeowners an alternative way to borrow money by leveraging the equity in their homes, without altering their existing mortgage. Essentially, they operate alongside your primary mortgage and are based on the portion of your home that you own outright, rather than its total value.

How It Works

Imagine you own a house valued at £200,000 with a mortgage balance of £150,000. You effectively have £50,000 of equity, which represents the mortgage-free portion of your home. A second charge mortgage allows you to borrow against this £50,000 equity.

What Happens If You Can’t Pay?

It’s important to understand the risks involved. If for any reason you can’t repay and your home is repossessed, the sale proceeds will first go towards clearing your original, or “first charge” mortgage. Only after this will any remaining funds be used to settle the second charge mortgage.

The Rising Popularity of Second Charge Mortgages

Recent data from LoanWarehouse shows a sharp increase in the use of second charge mortgages, with £1.71 billion borrowed in the last year alone—a 45% rise from the previous year. This surge is tied to the substantial growth in home values since the onset of the pandemic, which has boosted homeowners’ equity, thus enabling more people to opt for second charge mortgages.

Common Uses for Second Charge Mortgages

1. Home Improvements: Many homeowners choose second charge mortgages to fund renovations such as extensions or attic conversions when they lack sufficient savings.
2. Debt Consolidation: This is another popular reason, where homeowners consolidate multiple debts into a single loan with a more manageable interest rate, helping streamline their finances.

The pandemic has accelerated these trends, with many adapting their homes for remote work and managing financial challenges by consolidating pandemic-incurred debts.

Benefits Over Remortgaging

Opting for a second charge mortgage can be advantageous compared to remortgaging:

• Avoid Early Repayment Fees: Remortgaging can often incur hefty early repayment charges.
• Maintain Favorable Rates: With a second charge mortgage, your original mortgage rate remains unchanged, which can be beneficial if current rates are higher.
• Avoid Loan-to-Value Issues: Remortgaging for a higher amount might push you into a higher loan-to-value bracket, potentially increasing your interest rate.

Considerations and Cautions

While there are clear benefits, there are also several considerations:

• Higher Interest Rates: Because they are considered riskier, second charge mortgages typically come with higher interest rates than primary mortgages.
• Limited Choices: Not all lenders offer second charge mortgages, and those that do may only provide them through brokers, potentially limiting your options and requiring broker fees.

The Market

Due to the specialist nature of second charge mortgages, many of the best deals are available only through brokers. Some mortgage brokers may not handle these loans directly but can refer you to specialists in this market segment.

Second charge mortgages can be a viable option for homeowners looking to leverage their property’s equity for financial flexibility. However, it’s crucial to weigh the benefits against the potential risks and costs, and consider consulting with a mortgage broker to explore the most competitive and suitable options available.