First Charge Mortgages

Mortgage products available in the UK marketplace are predominantly referred to as either first charge or second charge mortgages. A first charge loan is one that is secured on a residential or commercial asset in its entirety and is a contract between a lender and a borrower to repay a loan advanced over a pre-determined timescale.

It is common that a lender will insist upon certain restrictions for the duration of the loan in order to protect their loan. Restrictions will often include those relating to further borrowing or will extend to property usage or development that could adversely affect the value of the property asset.

Second charge mortgages are effectively the second mortgage on a property. In cases where there is a second charge mortgage, there will be two mortgages on a single property [the first and second ‘charge’]. Second charge mortgages have been traditionally used for the purposes of home improvements or debt consolidation and in instances where the existing first charge mortgage lender is unable or unwilling to underwrite an additional loan.

If you are arranging a second charge mortgage you will require the consent of your existing lender to allow this further borrowing to sit behind your existing mortgage. In the event of loan default and repossession, the mortgages will be repaid from the sales proceeds in order of priority. It is for this reason that historically second charge mortgages have been more expensive as these lenders are taking more risk that their loan may not get repaid.

It is possible to arrange both first and second charge mortgage on residential and commercial property in instances where either a traditional term-loan mortgage is sought or where short term bridging or development finance is required. Regardless of property asset or type of mortgage sought, it is advisable to seek the assistance of an experienced intermediary who has access to a wide selection of lenders active in the mortgage market.

How Are First Charge Mortgages Repaid?

First charge mortgages' repayments tend to be spread out over a number of years, as in the case of a traditional mortgage that may last 20 years or more before the loan plus interest is fully repaid. There are two common routes of repayment with first charge mortgages:

Repayment Mortgages – These are the mortgages that consumers are most familiar with whereby the amount borrowed plus interest is repaid over the course of an agreed number of years through by way of monthly repayments. Assuming that payments are made on time, the balance is guaranteed to be repaid in full at the end of the mortgage term. Borrowers can also choose how to manage the interest and whether the mortgage is a tracker mortgage or the interest is fixed at an agreed rate for a set period.

Interest Only Mortgages – In these cases, the borrower’s monthly repayments will only pay off only the interest due on the loan. This means that the borrower will have to make a lump sum repayment at the end of the mortgage term to pay off the principle balance. A lender will insist that a plausible repayment strategy exists, typical strategies include sale of property or other assets, inheritance or from a capital event in the future. It is important that a borrower regularly assesses whether their repayment strategy is likely to repay the loan when it falls due at the end of the term.

What is a Regulated Mortgage Contract?

Regulated mortgage contracts are those that are monitored by the FCA and are designed to ensure that borrowers are offered loans that they can afford, that are fair and offered in terms that a borrower can understand.

Mortgages are deemed regulated most commonly if the property upon which a loan is secured is deemed to be inhabited by the borrower. As with self-build finance, both first and second charge mortgages can be deemed as regulated mortgage contracts.

More Information

Second Charge Mortgages