Second mortgages, second charge mortgages, equity release… what does it all mean, and are they a good idea?
As their name suggests, second mortgages are an extra mortgage you take out on your home.
They’re normally for amounts of £1,000 or more. And they’re secured against your home, which means that if you can’t make the repayments then the lender could take your property from you.
As a homeowner, you can take out a second mortgage on any property you own – in fact, you can take out as many mortgages as you like, provided you have enough equity.
We don't compare this type of mortgage - this guide is for informational purposes only. But you can compare remortgages.
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What is equity?
Equity is the value that you build up in your home by repaying your mortgage. Let’s take a simple example.
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, for example, you’ll own £150,000 worth of your home. Or, to put it another way, you’ll have £150,000 equity in your property.
You can use a second mortgage to tap into 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.
Why should I think about a second mortgage?
You might want funds to carry out some home improvements perhaps, or to pay for an unexpected bill.
And you might find it difficult to get a loan anywhere else.
This could be because you don’t have a great credit history, or because you’re self-employed and don’t have enough years’ of accounts.
That’s when a second mortgage might be worth considering.
What’s the difference between a second mortgage and a second charge mortgage?
Nothing. They’re two ways of referring to the same thing.
Why not just remortgage?
With a remortgage, you pay off your current mortgage and switch to a new deal. So you have just one mortgage to pay.
Remortgaging can come at a price. If you’re on a long-term fixed deal, the lender might insist you pay a repayment charge when you remortgage.
Not only that, you might not be able to find a good deal when you remortgage. Particularly when mortgage deals are hard to come by, during challenging times like the Covid pandemic.
What are the pros and cons of a second mortgage?
- If you’re finding it difficult to get a loan, they’re a good way to raise some extra cash.
- If you’re self-employed or you have an irregular income, some lenders might not want to consider you for a loan. A second mortgage could be your answer.
- They let you stretch out payments over a long term, of up to 25 years.
- 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 way more interest, 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.
What should I think about when taking one out?
Start with your existing mortgage lender. Check whether they might be willing to give you a personal loan, as they already know you.
If not, or if the rates are high, it could be time to think about second mortgages.
Compare the rates that second mortgage lenders are offering. It’s important to look at the annual percentage rate (APR), which reflects what you’ll actually repay on the loan.
Make sure you look at all the extras too, like any fees for taking out a second mortgage.
Or any charges for paying it off early. And do the sums. Work out how much you have to pay back each month, and see if you have enough left over after your monthly outgoings.
How much could I take out with a second mortgage?
Normally, you can borrow anything from £1,000. You can’t buy 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.
How much will I pay?
How much you pay each month for a second mortgage depends on three things: how much you borrow, how long you borrow the money for and the rate of interest that the lender charges.
Interest rates can often be higher on second mortgages. Be careful and make sure you do the sums to see what you can afford each month. You might want to ask an advisor for help.
What happens if I sell my property?
When you sell, you’ll have to pay off your second mortgage or move it over to a new mortgage.
Again, a word of caution. Following a house sale, the first mortgage will get paid off first.
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.