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Second mortgages

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Getting a second mortgage could be a good idea if you want to borrow some cash, but you need to be aware of the risks to decide whether they're right for you.

We don't compare this type of mortgage - this guide is for informational purposes only. But you can compare remortgages.

This guide will take you through how second mortgages work, how much you could borrow and the pros and cons.

Model house flanked by two piggy banks

A second mortgage, also known as a second-charge mortgage, is an extra mortgage loan you take out with a different lender that's secured against your home.

This means, your home is at risk if you can't keep up the repayments.

When you take out a second mortgage, you're borrowing from the equity you've built up in your home. The more equity you have in your home, the bigger chance you are to be accepted to borrow more.

Let's say you buy a property for £200,000 and put down a £10,000 deposit. You’ll take out a mortgage of £190,000 to cover the rest.

To begin with, you only own £10,000 worth of your home. But as you pay the mortgage off, you’ll own more and more of it.

If you have £50,000 left to pay on your mortgage, you’ll own £150,000 worth of your home. So you’ll have £150,000 equity in your property.

You can get a second mortgage using this equity. You could borrow some of it, or all of it if your lender will let you. But you can’t borrow more than the equity you have.

With a remortgage, you pay off your current mortgage and switch to a new deal. So you have just a single mortgage to pay. When you remortgage, you can either stick with your current lender or move to a different one.

With second mortgages, you're paying off 2 loans at the same time. The second mortgage is a seperate deal to your original mortgage with a completely different lender.

If you don't want to remortgage, there's also further advance. Further advance is slightly different to second mortgages, where you borrow more from your current lender at a different rate to your main mortgage.

People may choose to take out a second mortgage for the following reasons:

  • For home improvements - you might want extra cash to improve certain rooms in your home
  • If you're struggling to get a personal loan - whether that's because of poor credit rating, or you're self-employed
  • If your current mortgage has a high early repayment charge - so it works out cheaper to get a second mortgage than to remortgage to release equity

If you're thinking about taking out a second mortgage for whatever reason, it's best to talk to a mortgage advisor first. It's important to be aware of the risks and make sure you're confident you can afford the repayments on the extra borrowing in addiion to your main mortgage.

If you can't keep up with the monthly repayments, your property may be reposessed.

You can’t borrow more than the equity you have in your property.

So if your property is worth £200,000 and you’ve got £50,000 left to pay on your mortgage, the maximum you could borrow is £150,000.

If you can port your mortgage you could switch your mortgages to your new home, still staying with both of your lenders.

Another option is you'll have to repay both mortgages. Following a house sale, the first mortgage is first to get paid off. If the total you get from the sale doesn’t cover the second mortgage, the lender will want to make sure they get their money back.

Pros:

  • If you’re finding it difficult to get a loan, for example if you're self-employed or you have an irregular income, a second mrtgage is a good way to raise some extra cash.
  • They let you stretch out payments over a long term, of up to 25 years.

Cons:

  • If you’re already struggling to make your mortgage repayments each month, a second mortgage could be a mistake. You could even end up losing your home.
  • Because the mortgage tends to last for up to 25 years, you could end up paying more interest than a personal loan, making it more expensive in the long run.
  • If you’re only looking for a small amount to borrow, a personal loan or even a credit card might be worth looking at instead.

Other things you need to consider before taking out a second mortgage include:

  • If you miss or make any late payments it'll be recorded on your credit record - This could make it harder for you to borrow in the future.
  • Second mortgages have higher interest rates - You should typically expect to pay higher interest rates than on your first mortgage, so make sure you can keep up with repayments
  • There are extra costs and fees to pay - Like with any regular mortgage, there are extra fees for taking out a mortgage with a new lender. So you need to consider if you can afford these as well.

 

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