Second-charge mortgages are becoming more popular with homeowners, but could it be ever a good idea to secure another debt upon your home?
Nearly 2,000 second-charge mortgages were granted in January, being an increasing number of homeowners looked to gain access to against their properties without remortgaging, according to the Finance and Leasing Association (FLA).
But is really a second-charge mortgage really a risk worth taking? Here, we explain how these loans work and provide advice on the pros and cons of further borrowing.
What is a second-charge mortgage?
A second-charge mortgage happens when you take out another loan in your home, using equity you've developed as security.
These loans are usually offered by specialist providers via lenders. Homeowners usually take them out to finance major small remodels or because a alternation in circumstances – like a credit issue or becoming self-employed – prevents them from remortgaging to unlock extra money.
While second-charge mortgages can allow you to take full advantage of any equity you’ve developed, they remain a risky option, as you’ll be saddling your house with further debt.
When you apply for any second-charge mortgage, you’ll have to undergo credit checks and stress-testing to satisfy the lender that you’ll be able to pay back the loan. They’ll also require your property to become valued to be able to work out how much equity you possess according to what it’s currently worth.
Second-charge mortgage market grows
New data in the FLA shows that 1,945 second-charge loans were granted in January, at a total worth of lb85m – that's a rise of 18% year-on-year.
But, regardless of this rise in popularity, second-charge loans make up a really small proportion from the overall mortgage market. Indeed, just 23,829 loans were granted within the whole of 2022.
Fiona Hoyle from the FLA says: ‘The second-charge mortgage market has made an impressive begin to 2022.
‘As the majority of this market is broker-introduced, it suggests that understanding of second charge mortgages among brokers is growing.’
Why do people take out second-charge mortgages?
Funding major small remodels and with alterations in circumstances are some of the main reasons homeowners remove second-charge mortgages.
While they won’t function as the right option for everyone, these financing options can make sense in specific circumstances, which follow:
Reasons to prevent a second-charge mortgage
Even if the above is sensible, second-charge mortgages are highly risky – in the end, you’ll be increasing the chance of losing your home should you default.
You should avoid getting a second-charge mortgage if the following applies:
What basically sell my house?
If you decide to move, the original mortgage you got on the property will have to be settled first.
Once this is cleared, you’ll need to pay back the 2nd mortgage – and the lender has the right to pursue this legally if you fail to achieve this.
Second-charge mortgages and LTV ratios
When you take out a traditional mortgage, the amount you're borrowing is set from the total property's value.
So, if you’re buying a home worth lb200,000 and you have a lb20,000 deposit, you'll be borrowing lb180,000 – that's 90% loan-to-value (LTV).
Second-charge mortgages work slightly differently.
When you take out a second-charge loan, the combined debt on your existing mortgage and the second-charge mortgage can not be over the stated maximum LTV – and also the best minute rates are only accessible up to and including total of 65% or 70% LTV.
So if you’ve built up to hold half of the equity inside your lb200,000 home (lb100,000) through a combination of the deposit you originally put down and the repayments you’ve made since, you'll only be able to take out a maximum of 15% of the property’s value to get a second-charge mortgage in an LTV of 65%.
As ever, the equity you've in your home – and also the amount you've repaid on your mortgage – includes a significant effect on the rate you can achieve.
Second-charge mortgage rates
The cost of second-charge mortgages has dropped significantly in the past year or two, meaning now you can obtain a product taking you up to 70% LTV for a price of under 4%.
Both fixed-rate (for periods of two or five years) and variable-rate (based on the lender’s standard variable rate – SVR – or even the base rate plus or minus a particular margin) deals are available, although the cheapest rates at this time are on variable products. When taking out one of these mortgages, you may want to pay an agent fee – which could give a significant expense towards the total cost from the loan.
Second-charge mortgages are usually provided by specialist lenders, for example Paragon Bank, United Trust Bank, Prestige and Shawbrook – which is Paragon that currently offers market-leading rates.
The table below shows the cheapest advertised rates on second-charge mortgages at different LTV levels.
| Max total LTV | Lender | Current variable rate | APRC | Max loan amount | Minimum term | Max term |
| 65% | Paragon Bank | 3.57% | 3.8% | lb500,000 | 5 years | 25 years |
| 70% | Paragon Bank | 3.85% | 4.1% | lb500,000 | 5 years | 25 years |
| 75% | Paragon Bank | 4.4% | 4.9% | lb250,000 | 5 years | 25 years |
| 80% | Paragon Bank | 5.56% | 6.7% | lb100,000 | 5 years | 25 years |
Advice on your mortgage options
If you're considering remortgaging to release cash out of your property or getting a second-charge mortgage, it can be helpful to take advice from the whole-of-market mortgage broker.
