What is a second mortgage?
A second mortgage is a loan secured on a property which already has a first mortgage secured on it. They are sometimes known as 'secured loans', 'home equity loans' or 'homeowner loans'.
For example, if your home is worth £200,000 and you have an existing mortgage for £50,000, you would be able to take a second mortgage based on the equity in your home (in this case £150,000).
How does it work?
It works very much like your main mortgage. The lender advances a lump sum of money which you repay on a monthly basis over a term that is fixed at the outset. Most second mortgages are arranged on a 'capital and interest' (repayment) basis meaning that the amount you owe decreases each time you make a payment.
Some 2nd mortgages can work slightly differently. A limited number of lenders offer a facility where you have a pre-agreed line of credit and you can draw the money as and when you need it. This is often used if you need to draw the cash in stages – for example to fund the building of another home.
What is the difference between a second mortgage and a remortgage?
A second mortgage is a loan that is secured on your home in addition to your main mortgage. The lenders in this case are often different meaning you have two separate loans and two monthly repayments.
A remortgage involves switching your home loan from one company to another and, often, borrowing additional funds in the process. A remortgage involves one lender and one monthly repayment.
A remortgage can sometimes offer a lower rate although the fees and charges may be higher. You may also want to avoid moving your main mortgage. For example, you may have an excellent deal on your mortgage or your circumstances may have changed since you took out the loan.
What can I use it for?
You can use it for almost any purpose. People often use second mortgages to:
- Undertake repairs or improvements to their home such as a new kitchen, new bathroom, extension or conservatory
- Buy a second property as an investment or holiday home
- Buy a large item such as a car, caravan or motorcycle
- Consolidate other debts such as unsecured loans and credit cards
- Pay for one off items such as a wedding or a child's University fees
Can I use a second mortgage to pay off other debts?
Yes. Many people use the funds from a secured loan to repay other borrowings at high interest rates (such as personal loans or credit cards). As well as reducing the amount of interest you pay it can also help you simplify your payments. You can repay debts with multiple creditors leaving yourself with one simple, affordable loan.
Remember that by securing a loan you are putting your house at risk if you fail to keep up your repayments. Missing repayments on unsecured debts does not normally jeopardise your home.
How much can I borrow?
The amount you can borrow normally depends on two factors. Firstly, it will depend on the amount of equity that you have in your home. Generally speaking, the more equity that you have the more you can borrow. Lenders will often lend up to 75-90 per cent of the value of your home, less any existing mortgages or secured loans that you have.
In addition, the loan amount will also be based on your personal income and outgoings. You will have to demonstrate that you can afford both your main mortgage and the second mortgage.
What term can I take a second mortgage over?
Typically, you can take a loan between 3 and 25 years. The actual term will depend on the loan amount, your monthly repayments and your age.
I am self employed. Am I eligible?
Yes. Many self employed people turn to second mortgages if they are struggling to be agreed for a remortgage or an additional loan with their current lender.
For example, many mortgage lenders require three years accounts or similar from self-employed applicants in order to agree a loan. However, second mortgage lenders frequently do not need the same level of documentation, meaning they are perfectly suited to self employed applicants.
What interest rate do I get?
The interest rate on your homeowner loan depends on a number of factors. Firstly, it will depend on the 'loan to value' – what proportion of the value of the property you want to borrow. If you borrow a high proportion of your home's value, your interest rate may be higher as the lender is taking a greater risk that they may not get their money back if the value of your property were to fall.
Secondly, the interest rate will be dependent on your credit rating. If you have a clean credit rating then you may benefit from a lower interest rate. If you have defaults, missed payments or arrears you may find your interest rate will be higher.
I have bad credit. Can I still get a second mortgage?
Yes. There are many lenders that will still consider a secured loan even if you have bad credit.
Bad credit could include missed or late payments on loans or credit cards, mortgage arrears, defaults, County Court Judgments (CCJs) or even a bankruptcy or Individual Voluntary Arrangement (IVA).
You may pay a higher interest rate if you have experienced credit problems in the past.
Why might the interest rate on a second charge be higher than on my main mortgage?
A second mortgage will normally have a higher interest rate than a first mortgage as there is a greater risk that the lender will not get all of their money back. This is because your first mortgage lender has priority on any money that is available.
If you do fail to keep up your repayments, your second mortgage lender will only receive any money once the demands of your first mortgage lender have been satisfied.
Similarly, if your home is repossessed and sold, the first mortgage loan will be repaid first. This increases the chances that the second mortgage lender will not receive sufficient money to repay all of the debt – particularly if you borrowed a high 'loan to value' or if the value of your home has fallen.
As a second mortgage carries a greater risk to the lender, the interest rates are typically higher.
Do I have to tell my mortgage lender when I take out a second mortgage?
Yes. In fact, you have to tell them as most lenders have to give their consent for you to take out a second mortgage.
You must also provide your second mortgage lender with all the details of your main mortgage.
Can I take a payment holiday or make overpayments?
This varies from lender to lender. Some secured loan lenders will allow you to make overpayments in order to clear your loan more quickly. Others will let you take payment holidays, although you can end up paying more interest as the interest missed from taking a payment holiday is often added to the outstanding loan.
What if I don't keep up repayments?
As a second mortgage is secured against your home, your home is at risk if you don't keep up your repayments.
Even if you make all the payments to your first mortgage, your home could still be repossessed if you do not keep up payments on your second mortgage.
Can I move house when I have a second mortgage?
Yes. Some lenders will insist that you repay the second mortgage when you sell your home whilst others will let you secure the second mortgage on your new property.
In either instance, you may have some fees to pay. You should therefore talk to your second mortgage lender about moving before you make a decision.
Can I repay it early?
Yes. However, depending on your lender, you may have 'early repayment charges' to pay.
When you take out a second mortgage, your terms and conditions will detail what (if any) charges are applicable for you to pay off your loan early. Charges can often relate to the interest that you would have paid had the loan run its full course. Sometimes the charges will reduce if you have held the loan for a certain period of time.
When researching secured loans you should always ask what 'early repayment charges' are applicable if your circumstances charge and you do want to repay your loan early.
What if I am off work through ill health or I lose my job?
Many borrowers elect to take out Payment Protection Insurance (PPI) in order to protect themselves against being off work through accident or sickness or in case they are made redundant.
PPI normally provides a monthly sum to help you pay your mortgage and second mortgage if you are unable to work. You can generally either take insurance with your secured loan provider or with another company.
Always read the small print on such insurance carefully so you are aware of any restrictions or exclusions on the policy.