What Are Second Charge Mortgages?

second-mortgage

Second charge mortgages allow the use of the equity in the property as security against a secondary loan. Taking out a second charge mortgage means that there will be two mortgages on a single property at one given time. Second charge mortgages can include:

  • Mezzanine Finance
  • Stretch Senior Debt
  • Development Loans

These loans charge higher interest rates due to the increased risk associated with their use. Additionally, there are extra charges to consider with second charge mortgages as they are used for business and investment purposes rather than as a primary mortgage for the borrower’s place of residence.

Who are Second Charge Mortgages For?

These loans can be used for a variety of purposes but are not suitable for all. For example, they are not a replacement for re-mortgaging a property and are rarely long-term funding solutions. However, second charges can be used beneficially in many cases:

Business Ventures – As in the case of mezzanine finance and stretch senior debt and equity, a business owner may have a first charge mortgage on a property but needs some extra funding for a potentially highly lucrative business venture. In these cases, a lender may provide the additional funds on condition they receive a percentage of the business’ equity as additional security.

Self-Employed – Many lenders will not lend unsecured personal loans to those that are self-employed, as they are deemed to be of higher risk. Therefore, if a self-employed or contract worker has a first charge mortgage but needs to borrow a bit extra, they may be eligible for a second charge loan against their property.

Interest Changes – Second charge mortgages may be a solution in cases of borrowers who need to remortgage, but who have a low base rate tracker mortgage which would lose its low interest rate should they remortgage. Additionally, in cases where there are early repayment charges on a mortgage, a second charge mortgage may be preferable and more financially viable.

Who are the Lenders?

These loans can come from the lender of the first charge mortgage who may agree to allowing an additional drawdown on top of the first charge mortgage. Alternatively, some specialist lenders may provide a second charge loan. However, any second charge loan must be with the agreement of the lender of the property’s primary mortgage as they have precedence over any other financial arrangement against the property.

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.

Status Lenders

These lenders are fully regulated by the FCA and as part of their application process will perform credit, income and affordability checks on prospective borrowers. These lenders tend to have more terms to their policies than non-status lenders and will require all applications to be subject to underwriting. The costs incurred with these lenders are often higher as they must account for the additional costs such as credit checks and credit bureaus. However, upon acceptance of an application, they often lend at a higher Loan-to-Value (LTV) than non-status lenders.

Non-Status Lenders

Non-status lenders are regulated by the FCA under slightly different terms to status lenders. They do not however carry out the extensive checks and assessments performed by status lenders. These lenders are often used in cases where:

  • The lender themselves have the capability to perform the assessments, checks and valuations required
  • The borrower is self-employed, in an unstable job or is not in a position to state their income definitively; a crucial element for checks

Non-status lenders however may offer higher interest rates due to the increased risk associated with their nature of lending and they also offer loans of a lower LTV as they do not have the same information as a status lender. in addition, to be approved by a non-status lender, the applicant should still demonstrate a good track record with regards to their credit and affordability.

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