A second mortgage is a loan secured by the equity you have accumulated in a property you own. For homeowners, it presents an alternative to mortgage or taking out an unsecured loan.
When you take out a second mortgage, you leave your existing mortgage (first charge) in place. This means that you will have two outstanding mortgages on the same property. Default on any of them and you could potentially lose your home.
Is a second mortgage the same as a secured loan?
Yes. The terms “second mortgage” and “secured loan” are interchangeable. In addition to a secured loan, a second mortgage can also be called:
How do second mortgages work?
A second mortgage works the same way as a regular mortgage.
You borrow a sum of money and repay it, plus interest, in monthly installments over a pre-agreed term.
Second mortgages typically run for terms of five to 25 years. You can usually borrow from £1,000 up to six figures, depending on your income and the equity in your home.
Second mortgages can be priced either at a fixed rate or at a variable rate.
How do I get a second mortgage?
To get a second mortgage, you will need three things:
- sufficient equity in your property
- sufficient income to pay both mortgages
- a credit rating acceptable to the second mortgage lender.
If you take out a secured loan or a second mortgage, you will also be charged legal, administrative and appraisal fees. If you want to repay the loan early, you may also be charged an early repayment charge (ERC).
How much can I borrow on a second mortgage?
The amount you can borrow on a second mortgage depends on the equity in your home.
Equity is the percentage of your property that you own entirely, which is the value of your property minus the balance of your first mortgage. For example, if your property is worth £100,000 and your mortgage is £60,000, you will have £40,000 or 40% equity in your property.
Most second mortgage lenders impose a maximum loan-to-value (LTV) ratio for combined first and second mortgages on a property.
In the example above, the mortgage LTV is 60%. If a second lender had a maximum LTV of 80%, that means you could borrow an additional £20,000 (20%) secured against the property.
Who offers second mortgage loans?
Second mortgages and secured loans are offered by specialist mortgage lenders. Some examples are:
- Norton Finance
- Paragon Bank
- Pepper money
- Shawbrook Bank
However, they are usually sold through brokers.
What if I can’t make refunds?
A second mortgage is a loan secured on your property. This means your home could be at risk of repossession if you fail to keep up with repayments.
If a home is repossessed, the money from the sale will be split between the secured lenders in the order in which the loans are issued. Thus, the first charge mortgage lender will be paid first, then the second charge lender.
Since the second lender is second in line, they are less likely to be paid in the event of a shortfall. This is why second mortgages cost more than standard mortgages – they are riskier for lenders.
Aren’t secured loans a bad way to borrow?
Secured loans and second mortgages often have a spotty reputation. It has a lot to do with how they are marketed – for example, encouraging owners to “consolidate existing debt” into “one monthly payment”.
The problem is that many people take out a secured loan, use the money to pay off their credit card, overdraft, and other loans, but then go back to borrowing money. That leaves them with an expensive second mortgage and an assortment of debts elsewhere and in a worse position than they started out in.
If they miss the payments on the first and second mortgages, they could lose their home. With a secured loan, the lender benefits from the security, not the borrower.
If you’re having trouble repaying your debts, it’s better to consult a debt professional than to simply borrow more money.
Another disadvantage of second mortgage loans is that although interest rates can be competitive, these loans are generally offered at much longer terms than unsecured loans.
The terms of unsecured “personal loans” are normally for a maximum of seven years, but secured loans are often set up to end at the same time as your regular mortgage. It could be 10 or 20 years in the future, which means a bigger overall interest bill.
When might a second mortgage make sense?
A second mortgage can make financial sense in the following situations:
- Your current mortgage is at a low rate, so you don’t want to remortgage
- ERCs make remortgaging too expensive
- You are borrowing money for home improvements that will increase the value of your home
- Bad credit means you will be turned down for an unsecured loan
Advantages of a second mortgage
- Can be cheaper than an unsecured loan like a credit card
- Allow you to maintain a low mortgage rate if you have one
- More likely to be approved if you have bad credit
- Longer terms than unsecured loans, up to 25 years
The inconvenients a second mortgage
- You will have two mortgages on one property
- You Could Lose Your Home If You Can’t Pay Both Mortgages
- In the longer term, this means paying more interest overall
- Requires discipline if used for debt consolidation
Should I remortgage?
Whether you should take out a second mortgage or a mortgage to free up money depends on your situation. If your mortgage rate is particularly low, you may want to keep it and take out a second mortgage for the extra borrowing.
You may also have to pay prepayment charges (ERCs) on your existing mortgage if you want to remortgage before a fixed rate ends – ERCs can be expensive, although they often go down each year. ‘OK.
You may be better off remortgaging instead of taking out a second mortgage if you can remortgage at a cheaper rate than you are currently paying. It will also simplify things as you will only have one secured loan on the property.
If you don’t want to remortgage or take out a second mortgage, a “new advance” is another option. This is an additional loan to your main mortgage, but from the same lender and usually at a higher interest rate.
Another advance will be secured against your property, which means it works the same way as a second mortgage, but only one lender is involved.
Are second mortgages regulated?
Second mortgages and secured loans have been regulated by the Financial Conduct Authority (FCA) since 2016. The regulations mean that consumers are protected against incorrect advice or mis-selling by lenders or brokers.
It also means that second mortgage lenders are required to comply with FCA mortgage rules in areas such as affordable lending, advice and dealing with payment difficulties.