Second charge mortgages, sometimes referred to as second mortgages, have a secondary priority beyond your primary mortgage. These financial products are a form of “secured” loan, which means that they use your home as a security, and many people use them in an attempt to raise money without remortgaging.
A second charge mortgage gives homeowners the chance to use any equity that they have in their home as a kind of equity against another loan. This means that you end up with two mortgages on your home. For those who are unsure, equity is the amount of your property that you own outright, which equals the value of your property minus any mortgage that’s owed on it. For example, if your home were worth £200,000, and you have £100,000 left to pay, you’ll have a maximum borrowing ability of £100,000.
Taking Out a Second Charge Mortgage
Lenders must now comply with stricter EU and UK rules regarding mortgage advice, dealing with payment difficulties, and affordable lending. This means that lenders need to make the same checks for affordability as they would with a primary or first-charge mortgage. Borrowers will also be required to provide evidence that they’re actually capable of paying back the loan that they’re applying for.
There are many reasons why someone might apply for a second-charge mortgage. For instance, they can be a good idea if you’re struggling to get unsecured money that you need for personal reasons, perhaps because of self-employment. Additionally, if your credit rating has been damaged since you took your first mortgage, remortgaging could mean that you end up paying more on your entire mortgage, rather than just interest on the extra you want to borrow.
If your mortgage has a very high charge for early repayment, you may find that it’s cheaper to apply for a second-charge mortgage than to remortgage your home.
What to Remember with Second Charge Mortgages
Although many homeowners consider second charge mortgages to be very useful, taking one can be a big step that must be considered carefully. For instance, if you’re only just capable of repaying your mortgage at this stage, you should remember that you risk losing your home if you can’t keep up repayments on both your mortgage, and second-charge mortgage.
Additionally, you shouldn’t use a second charge mortgage to pay off a range of other smaller debts such as unsecured loans and credit cards. This could mean that you end up paying a lot more in interest over the long term, because second charge mortgages can run for twenty-five years. Additionally, this can also mean converting unsecured credit into secured credit.
Often, before you consider taking out a second charge mortgage, you may find it’s a good idea to get advice from a qualified person. There are many different advice solutions out there that can help you to find the loan that meets your needs and financial situation. These advisors will also need to follow the rules of the FCA when assisting you.
Remember, when you’re looking to take out a second charge mortgage, you should make sure that you begin by approaching your current lender and asking what might be charged for an additional loan to be placed against your home. At the same time, it’s often helpful to shop around and make sure that you’re getting the best possible rate by comparing the annual percentage rate that is offered by each lender that’s available to you. You can also check on other factors such as the length of the loan time, and the amount that you’ll have to repay in total. Be sure that you also find out the exact fees, mortgage terms, and early repayment charges that are used in your specific case.
Understanding Binding Offers
Remember, when a lender makes you an offer, they will need to give you a complete explanation of the essential features of your loan. This will mean that the often give a personalized document, which explains the terms of your offer, the details of your loan application, and summarizes features including fees. There may also be a reflection period provided, and you’ll have seven days from the time that the offer is given to decide whether you want to accept.
During the time when you can reflect on the offer, the lender’s offer will be binding and it will stand to the terms that have been given. However, there are a few exceptions to this rule. For instance, changes may be made if the information that you gave in your application isn’t true. It’s important to take advantage of the time you have to think about the offer that you have received, and how it compares to other loans. Remember, you don’t have to wait for the full reflection period if you’re sure that you want to go ahead with the mortgage.