Second Charge Mortgages and Remortgaging
Both second charge mortgages and remortgage arrangements have their benefits and pitfalls. However, they are not the same in nature with a second charge being a second mortgage on a single property and a remortgage being a new mortgage arrangement being put in place of the initial first charge on the property in question.
Second Charge Mortgages – This refers to the second mortgage secured against a proportion of equity of a property with an existing [first charge] mortgage already on it. This leaves the borrower with two distinct mortgages whereby the first charge takes precedence over the second. Second charge loans are often used in cases where a borrower needs to drawdown additional funds.
For example, as in the case of mezzanine finance, a borrower may seek to drawdown an additional 20% of their property’s value on top of an existing 60% mortgage. The lender already providing a first charge mortgage on a property may agree to lending 60% of this amount with a further 20% of the amount secured against a percentage of business equity and the borrower providing the further 20%.
These are also useful to borrowers who would incur early repayment charges on a mortgage. Rather than re-mortgaging, they may seek to obtain a second legal charge on their property, providing a cheaper repayment rate.
Remortgaging – This is where a borrower switches from one mortgage deal to another and may be provided by their existing lender or a new lender. a remortgage is still a first charge mortgage, but under new terms and as a new arrangement. A remortgage is often sought in cases where a fixed interest rate term ends or when a favourable introductory rate’s terms end.
A remortgage is also well utilised when a property’s value has greatly increased over the course of the initial mortgage. In these cases, a borrower may seek to drawdown additional funds, provided by a remortgage. For example, the owner of a property with a 40% mortgage whose property’s value rises over the years may seek to remortgage in order to obtain a now proportionately larger sum of money as the same percentage of equity is worth more.
With a remortgage, the mortgage on the property remains the primary mortgage, just perhaps through a different provider to the previous agreement. A Second charge mortgage is a second mortgage on the same property.