There are points in all of our lives where we need to make some careful financial decisions. Whether it’s buying a property, starting a family or embarking on home improvements or major repairs, there are times where taking out an extra loan may be needed. For those of us who already own a property, one option is to release some of the equity by taking out a second charge loan.
Also known as a second homeowner loan or a second mortgage, a second charge loan is an additional loan that is secured against your property. The second charge loan can be taken out with the same lender as your first mortgage, or with a different one. It essentially works in exactly the same way as a regular mortgage.
Payments must be kept up with both mortgages concurrently, but if you sell your home, the proceeds go towards repaying the first mortgage in full before paying off the second. Be aware that the second charge lender can follow up for any shortfall. Just as with your main mortgage, if you fail to keep up repayments on your second charge loan, you could lose your home.
When choosing between a re-mortgage and a second charge loan there are a number of factors to consider.
When you re-mortgage, you’re effectively paying off your existing mortgage and replacing it with a new one. Re-mortgaging can be a good option if there’s a better deal or fixed interest rate available which improves upon the rate you’re paying on your existing mortgage. People typically re-mortgage if they’re looking to reduce payments or borrow more against their property at a better rate.
However, the type of existing mortgage, its terms and conditions and how much of its term is left to go could make re-mortgaging a more expensive option overall. For example, some lenders may charge significant exit fees or early repayment penalties, while others may not allow overpaying your mortgage or paying it down before a certain time period. It may be that the existing mortgage is already on a very good rate that can’t be matched elsewhere, and re-mortgaging might mean having to pay a higher rate.
Taking out a second charge loan has no effect on your existing mortgage, and in certain circumstances, could prove to be a cheaper alternative, although it’s important to compare second charge loans to get the best deal. A second charge loan works in the same way as a regular mortgage. The equity you have in your home (that’s the entire value of your home, less the amount still outstanding on your existing mortgage) will be used to secure the second charge loan.
For example, if your home is worth £300,000 and you still have £200,000 outstanding on your mortgage, then you can borrow up to a maximum of £100,000 on a second charge loan.
To help you decide whether re-mortgaging or taking out a second charge loan is best for you, consider talking to a professional advisor.
In taking out a second mortgage, it’s important to remember you are committing to greater, regular repayments. While the equity on your home theoretically dictates the maximum amount you can borrow in a second charge loan, lenders must still adhere to the same strict rules to ensure that your financial circumstances can cope with the extra debt, and you’ll likely need to prove you can afford the repayments. It may not be advisable to consider making that commitment if you’re already just about managing to repay your existing mortgage.
Don’t be tempted to take out a second charge loan to consolidate smaller debts. The interest you pay on a loan that can run for up to 25 years could end up with you having to pay back more in the long run. There may be more suitable types of loans available to help consolidate unsecured debts such as credit card balances, for example.
Before deciding whether a second mortgage is right for you, it’s a good idea to take some expert advice from a qualified, FCA regulated financial advisor. By taking professional advice, you can be assured they’ll compare second charge loans to help you find the most appropriate deal. If it turns out this type of loan is not right for you, then the adviser can help you find the right type of product that is most suitable for your needs.
Taking the advice of a regulated advisor means they’ll follow the FCA’s rules when providing financial advice. This is designed to protect you. Without formal advice, whatever decision you make could result in taking out a loan that’s not suitable for your financial situation, and you’ll find it difficult to lodge a complaint.
If you’re doing your own research and conducting your own second charge loans comparison, one of the first steps you may wish to take is to talk to your existing lender, to find out what the charges would be for an additional loan. But you don’t have to go with them – it pays to shop around and compare second charge loans. To help you to do this, our second charge loans comparison will provide extensive information.
At Bright Loans we can help you explore your options by offering a free second charge loans comparison service. Simply enter your details and let our smart technology do the heavy lifting for you. We’ll find quotes for you to review and rest assured, our secure website ensures your personal and financial details are protected.
As you make your second charge loans comparison and narrow down your options, ensure that you consider the mortgage terms and conditions. Check out the rates of interest, early repayment penalties and fees and compare the lenders’ APRC (annual percentage rate of charge). Consider how long the loan is for and the total amount you’ll be paying back.
Most importantly, make sure that your decision is an informed one, and where necessary, seek professional advice.