Second mortgages

It’s where a loan secured on the property is given from a source other than the original lender. 

The second lender takes second priority to the first lender. This means if the property ever needs to be sold, the first lender will have first call on equity in the property. 

As with any mortgage secured on your property, failing to repay it could mean you’ll lose your property.

It's also worth thinking about how taking on extra borrowing could affect your everyday spending over the mortgage term.

The maximum second mortgage you can get depends on the amount of equity you’ve built up in your home.

A second mortgage allows you to use any equity you have in your property as security against another loan.

It means you’ll have two mortgages on your property.

Equity is the percentage of your property owned outright by you, which is the value of the home minus any mortgage(s) owed on it. The amount a lender will allow you to borrow will vary. However, up to 75% of the equity in your property will give you an idea. 

Lenders have to comply with rules that cover affordable lending. 

This means lenders have to carry out the same affordability checks and ‘stress test’ your ability to meet future mortgage payments as they would for an applicant for a main or first charge residential mortgage.

There are several reasons why someone might take out a second mortgage:

• If you’re struggling to get some form of unsecured borrowing – such as a personal loan, perhaps because you’re self-employed.
• If your credit rating has worsened since taking out your first mortgage, remortgaging to a new mortgage to cover your house loan plus a further loan could mean you end up paying a higher interest rate on the whole new mortgage so you will pay more interest overall. Taking out a second mortgage means you would only be paying the higher rate and extra interest on the new amount you want to borrow.
• To consolidate ‘unsecured’ debt, like credit cards or personal loans. While the interest rate of a second mortgage may be lower than what you’re currently paying to pay off your debt, you'll often end up paying more over a longer term. And if you can't keep up with repayments, you risk losing your home, so this should be a last resort.
• If your current mortgage has a high early repayment charge, it might be cheaper for you to take out a second charge mortgage rather than to remortgage to release equity from your property.

The suitability of the examples above will depend on your personal circumstances. Provided you’re up to date on your mortgage payments, it’s worth considering a further advance from your existing lender on better terms – as it might be a better option. 

If you sell your home, you’ll need to pay off your second charge mortgage. Or, if your lender allows it, transfer the second mortgage to a new property.

Although second mortgages can be useful, taking one out is a big step – the interest rates can be a lot higher than for first mortgages and paying the loan back over a longer term will cost you more in interest payments. So, you need to weigh up the pros and cons.

Before you take out a second mortgage, check if you can get a further advance on your existing mortgage first and get advice from a suitably qualified adviser.

They’ll be able to help you find the loan best suited to your needs and financial situation.

They’ll have to follow the rules set out by the Financial Conduct Authority (FCA) when dealing with you. These rules are designed to protect you.

If you choose not to get formal advice, you run the risk of taking out an unsuitable loan for your circumstances. If this happens, you might find it difficult to make a successful complaint.

When you’re looking into a second mortgage, make sure you:

• shop around – make sure you get the best rate by comparing lenders’ APRC (annual percentage rate of charge), the duration of the loan and the total amount you’d have to pay back
• find out the exact mortgage terms, fees, early repayment charges and rates of interest.

When the lender makes you an offer, they’ll have to give you an explanation of the loan’s essential features.

They’ll also give you a personalised document. This might be referred to as a European Standardised Information Sheet or a Key Facts document. This document:

• provides a reflection or ‘cooling off’ period
• explains the terms of the offer
• recaps some of the details of your loan application
• summarises features – including any fees, the APRC and changes to your monthly repayments if the interest rates rise beyond a particular point.

You have the right to take seven days from the time the offer is made to think about whether you want to accept.

Some lenders might give you more than seven days.

During this time, the lender’s offer is binding, and they will stand by the terms you’ve been offered.

There are a few exceptions though – for example, if the information you gave in the application is found to be false, the terms could be rendered invalid.

It’s a good idea to take advantage of this time to not only think about the offer you’ve received but to also compare it with other loans.

If you’re sure you want to go ahead with it, you don’t have to wait out the full reflection period to tell the lender you’ll accept the mortgage.

As a second mortgage works very much like your first mortgage, your home is at risk if you don’t keep up the payments. Like any mortgage, if you get into arrears and don’t pay it back, additional interest can mount up.

If you sell your home or it’s repossessed, the first mortgage gets cleared in full before any money goes towards paying off the second mortgage. However, be aware that the second mortgage lender can pursue you for any shortfall.

A further advance involves taking on more borrowing from your current lender. The rate will often be different to that of your main mortgage but can usually be on better terms when compared with a second mortgage.

If you need to borrow a small amount of money, you might be better off going for an unsecured product, such as a personal loan.

If you don’t have a large early repayment charge on your current mortgage, you have some equity in your home and your circumstances haven’t changed, you could be better off remortgaging.