Is a Second Charge Loan Right for you?
Read our recent blog on Second Charge Loans, by: Olivia Portman, Operations Assistant to Justin Phillips, at Open Vision Finance.
Second charge loans are a secured loan, which means they use the borrower’s home as security. A lot of people use them to raise money for further home improvements instead of re-mortgaging but there are some things to be aware of before you apply.
How does getting a second charge loan work?
For starters, you are only eligible for one if you are already a home owner! However, that being said you don’t necessarily need to live in the property.
A second charge can be a loan anything from £1,000 to £100,000 – maybe more if your property has sufficient equity within it. You will need to maintain a level of equity/deposit within your home – you wouldn’t be able to borrow 100% of your property value.
Essentially a second charge loan allows you to use any equity you have in your home as security against another loan.
It means you will have two charges on your home. The first legal charge being the mortgage and the second charge would be the proposed ‘second charge loan’.
A second charge loan would usually carry much higher interest rates than what you would be able to obtain with a residential mortgage.
Just like any other mortgage arrangement, failing to repay this could mean the repossession of your home.
How much can you borrow on a second charge loan?
Equity is the percentage of your property owned outright by you, which is the value of the home minus any mortgage you owe on it.
For example, if your home is worth £350,000 and you have £200,000 left to pay on your mortgage, you have £150,000 in equity.
The amount you wish to borrow will also be subject to an affordability assessment (as you would go through when applying for a mortgage), in addition to having sufficient equity in the first instance. Some second charge lenders advertise that they would allow overall borrowing (mortgage plus second charge) to be up to a maximum of 6 times your annual earnings.
Why do people take out a second charge loan?
Depending on the amount of borrowing required, this may exceed what is available by means of unsecured borrowing, such as personal loans.
You may be fixed into a current deal with your mortgage and have high early repayment charges for leaving the lender early. It may therefore be cheaper for you to take out a second charge loan rather than to re-mortgage and paying the exit penalties. Your adviser would also discuss the options of possibly incorporating this back into the mortgage borrowing in the future, if eligible to do so when you come to remortgage.
Due to affordability, the residential mortgage affordability is more stringent than second charge lending. In the typical mortgage market, you would be able to obtain a mortgage in the region of 5 times your annual earnings and as mentioned above, second charge borrowing can be up to 6 times your annual earnings.
You may have a really low interest rate which tracks the Bank of England Base Rate. If you wished to borrow more, you can keep you mortgage as it is and retain this interest rate and obtain a second charge loan for the additional required.
What if you move home?
It depends what product has been chosen, whether the product benefits a portability feature (the ability to pick up and move the legal charge onto another property). This is a popular feature with first charge mortgage products and not so popular with second charge products, however most second charge products do boast low or no early repayment charges.
If the product isn’t portable and you don’t have a product with no early repayment charges incentives, a penalty will need to be paid.
Some things to consider before taking out a second charge loan…
Before you take out a second charge loan, it’s a good idea to get advice from a suitably qualified advisor. They will be able to help you find the loan that best meets your needs and financial situation. They can exhaust your residential borrowing options before taking a second charge loan. They will contact your existing lender, for details of a further borrowing by means of a further advance.
The Advisor will have to follow the rules as set out by the FCA when dealing with you. These rules are designed to protect you.
If you choose not to get formal advice, you run the risk of taking a loan that isn’t suitable for you.
Should you need to get in touch regarding the above then of course do give us a call and we can discuss your requirements and determine whether a second loan is an option for you. Contact us on 01823 444022 or by email to email@example.com