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Second charge mortgages: what can they do for me?
Considering a second mortgage?
Borrowers who have had their mortgage for a long while might have been offered the chance to take a second charge mortgage. More often known as second mortgages, they are added on to the main mortgage premiums, and like any mortgage use your home as the security. Second charge mortgages are becoming increasingly popular with more mature homeowners who want to enjoy life and plan to use the loan to fund trips, home improvements and often weddings or other expensive items and events. Second mortgages are a way to release the cash in your house without remortgaging it completely.
What is a second charge mortgage?
The second charge mortgage means that you take a lump sum out of the mortgage which has already been paid on your home. You can use the equity of the home to secure the loan, meaning that you will have two mortgages on the house. Since you are buying the loan essentially with the part of the house which you have paid for, you now have a larger LTV percentage, and this can mean that you have to pay off the first mortgage faster. You can also only take out a mortgage on the equity which you have paid into the house, so for example a £200,000 house with £110,000 on the mortgage means that your second charge mortgage will only be available up to £90,000. You need to discuss the equity with the lender before making any decision.
Why take out a second mortgage?
Why bother with a second mortgage?
There are many reasons to take out a second mortgage, most of which include problems with the first mortgage. For example, if you would have to repay a high fee for a remortgage, then you may choose the second mortgage as the less expensive option. You may also benefit if you no longer have a good credit rating, for example, if you have been in debt with other companies since the first mortgage was taken out. Remortgaging in these circumstances could raise the rate of interest you will be repaying each month. Second charge mortgages can also be very useful when a family is growing, as they won’t have to pay the early penalty for the extra loan, and the higher rate of interest will be less than the total of the early payment fee.
When is it not right for me?
Second mortgages can be a bad idea in certain circumstances, for example if you have already started to struggle with your debts and are not repaying the primary mortgage. Nearly 900 properties were repossessed by lenders through second charge debts a few years ago, and that number has not really decreased in the following years.
Using the second mortgage to pay off debts which are spread across a large area may not a good idea. The second charge mortgage can last for 25 or 30 years, and that is a long time to be paying off credit card debts or unsecured loans as you will pay more interest in the long term. You have to commit to the second charge mortgage with your home, and while it may seem like a good idea to cover your credit card, you will be replacing a simple, unsecured debt with a secured loan, increasing your risks of repossession if you fail to meet the loan repayments.