Second charge loans on property
Mortgages raised for the purpose of buying a property are registered by the lender as a first charge 99.8% of the time. This means that paying off the mortgage will be first priority if that property is ever repossessed. The difference between the amount of the mortgage and the value of the property is known as equity.
It is possible to borrow money against this equity by remortgaging with another lender, who will pay off the existing lender and register their new higher loan as a first charge in place of the previous one. As an alternative, you could approach the existing lender for a further advance, which will then be registered along with the main mortgage as part of their first charge.
The other option is to secure an additional loan elsewhere. This is what is known as a second charge mortgage or loan, and it therefore has second priority to the original mortgage should the property be repossessed, Consequently, securing the loan as a second charge is a lot riskier for the lender.
If the property does need to be repossessed, and the equity has been eroded by a recession, a major event in the property market, problems with the property, mortgage arrears building up on the mortgage debt, etc etc, the second charge lender may not be able to recover its money. For this reason, the interest rates on second charges are higher in order to cover the greater prospect of the lender losing out if the proceeds of sale (after all costs) do not cover both the first and second mortgages.
Second charges were free of regulation before 21st March 2016, but now they are regulated by the FCA and are afforded the strict affordability checking that a first charge mortgage is subject to. When borrowing as a second charge, the cost of the first charge mortgage payments, all other living expenses, and credit cards/unsecured loans payments are all taken into account. So it may end up less beneficial to take out a second charge mortgage than it would be to take a further advance or remortgage.
Second charge mortgages usually go anywhere from a loan of £1000, right up to £250,000 and possibly beyond, depending on the available equity in the property. The second charge lender will work out how much equity is left after the mortgage and the proposed loan are put on the property, and the maximum loan will usually be down to many factors such as the type of security, the credit status of the applicant, and the amount being borrowed as a percentage of the value of the property.
Advantages of a second charge
1. If you have a very good rate with your existing mortgage, and remortgaging would mean you losing this rate, then a second charge might be a better option.
2. If you have acquired bad credit after taking your original mortgage, it might be easier to get a second charge other than re-mortgaging, as second charge lenders do offer in some circumstances a wider range of products for adverse sub-prime clients.
3. In most circumstances, getting a second charge completed is quicker than remortgaging, as many of them offer an in-house legal service that is included in the price of the second charge package. So you are not relying on a third party solicitor to complete the matter.
In summary, getting professional advice on the best option is always essential.
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