Second charge mortgages

Why use a second charge mortgage?

There are a few reasons why a second charge mortgage could be the ideal borrowing solution for your needs. These include: wanting to borrow more:

1. When your current lender can’t help
2. When you don’t want to remortgage away from a low rate
3. When Early Repayment Charges (ERC’s) still apply, so you don’t want to remortgage

A second charge can be a useful borrowing tool in all of these circumstances, but remember, you are ultimately increasing your debt. Don’t do this if you cannot afford the payments, as your property is at risk of repossession.

Some lenders will not allow you to take out extra borrowing with another lender in addition to the money they have lent you.

How much can I borrow?

The maximum loan to value on a second charge mortgage for a buy to let (a rental property someone will live in) is 75% of the property value.

If your security property is a commercial premises (a property a business occupies) then you can borrow up to a maximum of 65% LTV. Commercial property is more complex and as such carries more risk, which is why the LTV is lower.

Second charges versus further advances

If you want to borrow more money on a rental property or commercial premises, you could get what is called a ‘further advance’ from your existing lender. This is where they will agree to lend you more money than you currently owe them.

This extra cash is not added to the same pot as your existing borrowing as such, it is subject to a different mortgage rate. If you went on to remortgage the full amount, the two cash pots would then go back into one loan.

Given the lender already has a relationship with you as a borrower, further advance rates tend to be lower than second charge rates.

When your current lender can’t help

There are reasons why your existing lender might not be able to offer you a further advance. The most common are:

• You want to borrow over the lender’s maximum loan to value
• The rent your property receives doesn’t fit with the lender’s affordability calculation
• When you apply for a further advance your property is valued at a lower amount than expected

In these circumstances a second charge mortgage may be a good option. A second charge lender might have a higher loan to value cap, or have a more flexible affordability calculation which means you can get the borrowing you need.

When you have a low interest rate you don’t want to touch

If your existing borrowing is on a fantastic low interest rate and your monthly payments are very cost effective, but you want to raise more money, a second charge could be the ideal answer.

Mortgage rates change all the time. Whilst you may recently have taken out a mortgage or loan, or are even a year or two down the track, refinancing may not be cost effective now as it was when you last applied.

Second charge borrowing is entirely separate from the first mortgage or loan on your property (the ‘first charge’ on your property). Unlike a remortgage, you do not pay back what you owe and then borrow more. You simply leave your existing loan in place and take out another one.

Then your options are to either repay the extra borrowing over the term, or, when you do come to refinance, increase your borrowing to cover the first and second charge borrowing and bring the two amounts back into one mortgage.

Some borrowers find it helpful to take repeated second charges.

For example, say you are building a portfolio and start with one property, you have invested at a low loan to value to get a preferential mortgage rate, but a great deal on a property comes up and you want to raise a deposit.

You could take out a second charge to fund the purchase, keep the rental income in savings, then repay the second charge when you get to the end of, say, a two year fixed rate buy to let and refinance. Having put the rental income back into the property, you keep to your low LTV and can take out another second charge for another purchase when you next see a great property deal.

When an Early Repayment Charge applies

Early Repayment Charges (ERCs) apply if you are within the initial rate period of a mortgage. This is during the first two to five years, when you would be charged extra costs if you paid back the loan early and remortgaged to another deal.

Given these extra costs, it is unlikely to make financial sense to remortgage. But, if you still need to raise money, a second charge mortgage can give you a solution.

As mentioned above, the second charge finance is entirely separate to the existing borrowing. It will be with a different lender (otherwise you would be taking out what is called a ‘further advance’, which is borrowing more from your existing lender) with separate terms and conditions.

So, you do not repay your existing mortgage and are not charged ERCs as a result, but can raise more money for any legal purpose.

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