Second Charge Mortgages

13. 01. 09
posted by: addeduser
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We advise and arrange Second Charge Mortgages from our panel of lenders, and they have a range of repayment options to suit your financial needs.

What is a second charge mortgage?

A second charge mortgage is a loan that is secured against your home just like a first charge mortgage. So, essentially you have two mortgages secured against your property. This means your home may be at risk of repossession if you are unable to make the monthly repayments on either mortgage.

How much can you borrow with a second charge mortgage?

As the loan is secured against your home, you can normally borrow higher amounts than through a personal loan (for example over £25,000).

The amount you can borrow will depend on two main factors.

First, is your ability to repay your loan each month. This is called the affordability of the loan. This will be calculated by reviewing all of your income and expenditure which can include self-employed income through to benefits and pension income.

The other factor is something known as loan to value (LTV). LTV is calculated as the amount you owe on your mortgage as a percentage of the value of your home. In other words, the equity you have in your property. For example if your home is worth £300,000 and you have £150,000 outstanding on your mortgage, you have an LTV of 50%.

When should I consider a second charge mortgage?

A second charge mortgage is often suitable if the amount you wish to borrow is large (for example over £25,000), or if you wish to repay it over a longer period. This is because many lenders will be happier to lend higher amounts for longer if the loan is secured against a property.

A second charge mortgage is sometimes an option for individuals looking for a loan with an impaired credit history enabling the client to clean up their credit profile.

You may also find that a second charge mortgage could help you consolidate other forms of debt and may allow you to reduce your monthly repayments significantly. If you’re considering a debt consolidation loan, you should remember it may take you longer to repay your credit and you may end up paying more in total as a result as new interest is being applied to the new loan.

“Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage.”

Second charge mortgages are often a good alternative to re-mortgaging. For example, if you pay a low interest rate on your mortgage or have high redemption penalties – it could be cheaper to take out a second charge mortgage rather than re-mortgage.

How can I apply for a second charge mortgage?

Most second charge mortgage lenders don’t deal with customers directly. This means you will need to use a second charge mortgage broker/packager in most instances.

A second charge mortgage broker will assist with your enquiry and will then manage your application through to completion. They will provide help and assistance in completing all the paperwork and will deal with the lender to overcome any challenges that may arise.

A second charge mortgage broker will charge you a broker fee to cover the costs associated with arranging the loan for you – such as legal fees and valuation fees. This fee is added to the total cost of the loan and repaid along with the interest charged on the total amount borrowed. It will be included in the monthly repayment amount that your broker will provide. Alternatively, you can choose to pay this fee up front and avoid paying back interest on these over the term of the mortgage.

Most brokers will only charge the fee when your loan completes; it is important that you check with your broker first that you aren’t paying an application fee.

The second charge mortgage process

When you apply for a second charge mortgage, the broker will carry out a credit search using a credit reference agency such as Experian or Equifax. The credit search will check whether you have any adverse credit history such as missed payments, defaults or County Court Judgements which will potentially impact your ability to be accepted for a second charge mortgage. A credit search will include both individuals if you are making a joint application.

You will typically need to provide the following information:

  • Proof of income: using either payslips and employer’s reference if you are employed or proof of earnings if you are self-employed (such as an accountant’s certificate or SA302’s)
  • Proof of identity: using either a passport, driving licence or identity card plus a recent utility bill
  • Proof of mortgage: using a mortgage statement or by providing details of your mortgage

Your second charge mortgage broker will check and verify these documents then submit them on your behalf to the lender. Once your application has been approved in principal subject to any additional requirements being met the lender will issue you with an ESIS – this is usually a 5 – 8 page document that provides you with all the relevant details of the loan such as interest rate, monthly repayments, fees and early repayment figures.

There are various stages of a loan application and it is not possible to say how long they can take, if you require funds in a hurry please let us know at the outset of any timelines you are looking to adhere to.

Repaying a second charge mortgage

A second charge mortgage is repaid monthly like most other forms of credit. The amount you will pay each month will depend on the amount you borrowed, the loan term and the interest rate.

Your monthly repayment will include the loan, the broker and lender fees and the interest charged on the total amount borrowed. The repayments will continue monthly for the full term of the loan.

Like other forms of credit, if you miss a monthly repayment you may be charged a missed payment fee and your account will fall into arrears. This will be reported by the lender to credit reference agencies and it could impact your ability to obtain more credit in the future. If you are having problems meeting the repayments, you should always speak to the lender as early as possible.

“Your home may be repossessed if you do not keep up repayments on your mortgage or any other loan secured upon it.”

Early settlement of the second charge mortgage

If you want to repay your second charge mortgage early you will need to request a redemption or settlement statement from your lender. You will have to repay the outstanding loan balance, which will include any fees added to your loan when you took it out and any arrears and related charges that you may have incurred since the beginning of your loan.

You won't have to pay the full amount of interest that would have been due over the term of the loan, but most lenders will include a discharge fee in the redemption statement. A full breakdown of this will be provided from the outset in the ESIS.

It’s worth remembering that because interest on your second charge mortgage is calculated on the amount of debt outstanding each month, you will be paying more interest at the start of your loan compared to the end. This means you will be repaying the outstanding loan balance more slowly at the beginning of your loan than at the end and your redemption statement will reflect this.