1. Security
The loan is secured against the equity in your property, which means your home is used as collateral. This loan is considered a "second charge," so if you already have a mortgage, the lender of this second loan will rank behind your first mortgage lender. If your property is sold, the first mortgage is paid off first, followed by this second loan.
2. Interest Rates
Interest rates for second-charge loans are generally higher than those for first-charge mortgages. This is because the lender faces more risk. If you default and the property is sold, the first mortgage must be cleared first, meaning the second lender has less security and could get back less of what they are owed.
3. Loan Amounts
The amount you can borrow varies widely, depending on the equity you have in your property. Equity is the difference between the value of your property and what you owe on your mortgage. Lenders usually only allow you to borrow a percentage of this equity, so the higher the equity, the larger the potential loan.
4. Term Length
The length of a second-charge loan can range from just a few years to several decades, depending on the lender and the agreement. Shorter terms mean higher monthly repayments, while longer terms can make the monthly payments lower but could mean paying more interest over time.
5. Priority in Default
If you default on repayments and your property is sold, the money from the sale will first go towards paying off your first mortgage. Only after that is paid will the second-charge lender receive their payment. This is why second-charge loans are considered riskier for lenders.
6. Repayment Structure
Repayment options for second-charge loans can vary. Some lenders offer interest-only payments, where you only pay the interest each month and the full loan balance is repaid at the end of the term. Others offer plans where you pay off both the loan amount and interest over time, so by the end of the term, the loan is fully repaid.
Why do people take second charge loans?
1. Home Improvements
If you're thinking about renovating your property or adding an extension, a second charge loan can give you the funds you need for bigger projects. These improvements could potentially increase your property’s value, making it a long-term investment. Many homeowners use this type of loan to update kitchens, bathrooms, or add extra living space like loft conversions or home offices.
2. Debt Consolidation
A second charge loan can be used to combine multiple high-interest debts, like credit cards or personal loans, into a single loan with a lower interest rate. This could help reduce your monthly repayments and make managing your debt easier. It also gives you a more structured way to pay off what you owe over time.
3. Education Costs
If you’ve got large university tuition fees or private school bills, a second charge loan can help spread the cost. This can be especially helpful if these fees come all at once, making it easier to pay for your or your children’s education without affecting day-to-day finances.
4. Business Investments
You might be considering starting a new business, expanding an existing one, or covering day-to-day business costs. A second charge loan can provide capital for these investments without needing to apply for a business loan, which can sometimes be harder to secure.
5. Large Purchases
Whether you're looking to buy a new car, a holiday home, or finance another significant purchase, a second charge loan can offer the funds you need upfront. Spreading the cost of large purchases over the loan term could make it more affordable than paying all at once, especially if you’re unable to use a typical loan or credit arrangement.
6. Tax Bills
If you’re hit with an unexpected tax bill, such as a large income tax payment or inheritance tax, a second charge loan could help cover the cost. This can be useful if you don’t have immediate access to cash but need to pay off the bill quickly to avoid further penalties or interest from tax authorities.
Lender Requirements
1. Equity
To qualify for a second charge loan, you need to have enough equity in your property. This is the difference between your home’s current market value and the remaining balance on your mortgage. Lenders usually look for a combined loan-to-value (CLTV) ratio — this includes both your first mortgage and the second charge loan — of no more than 85-90%. For example, if your home is worth £200,000, and you owe £150,000 on your mortgage, you may be able to borrow up to £30,000 to £40,000, depending on the lender's criteria.
2. Credit History
A good credit history often improves your chances of securing a second charge loan at better rates. Lenders want to see that you’ve managed past debts responsibly. However, some lenders offer second charge loans to people with less-than-perfect credit.
3. Proof of Income
To ensure you can repay the loan, lenders will require proof of your income. This could include tax returns or bank statements showing regular income if you’re self-employed. They use this information to check that your income is stable enough to cover the repayments on top of your existing mortgage.
4. Consent from First Charge Lender
Before you can take out a second charge loan, your first mortgage lender must be informed. In most cases, the first lender’s consent is required because the second loan affects the overall security on the property. The first lender needs to agree that, in the event of a sale or default, they remain the first to be repaid.
5. Valuation
A professional valuation of your property is needed to determine its current market value. This allows the lender to calculate how much equity is available for the second charge loan. The valuation ensures the loan is based on up-to-date figures, which helps both you and the lender understand the risk involved.
6. Affordability Assessment
Lenders will conduct a thorough review of your financial situation to ensure you can afford the extra debt. This includes looking at your income, current outgoings, and any other debts. They also stress-test your finances to see how you’d manage if interest rates were to rise. This assessment is done to prevent you from taking on more debt than you can realistically manage, keeping both you and the lender protected.
Advantages of Second Charge Loans
1. Preserves Primary Mortgage
One of the biggest advantages of a second charge loan is that it allows you to keep your current mortgage terms, which can be especially beneficial if you have a low interest rate or favourable repayment terms. This means you don’t have to go through the process of remortgaging, which could result in higher rates or early repayment charges.
2. Access to Additional Funds
A second charge loan gives you access to significant funds without needing to remortgage or sell your property. If you have built up equity in your home, you can borrow against it and use the funds for things like large purchases, education costs, or even business investments. This can be a simpler option if remortgaging isn’t suitable for you.
3. Flexibility
These loans offer flexibility in how you use the funds. Unlike some specific types of loans, a second charge loan can be used for a range of purposes, such as making home improvements, consolidating debts, or covering large, one-off expenses like buying a new car or paying for a wedding. This makes them a versatile financial option.
Disadvantages of Second Charge Loans
1. Higher Interest Rates
Because second charge loans are riskier for lenders (they rank behind the first mortgage), they tend to have higher interest rates compared to first charge mortgages. This means you’ll likely pay more in interest over the course of the loan, making it more expensive than other forms of borrowing like personal loans or remortgaging.
2. Increased Risk
Taking on a second charge loan adds another layer of debt that’s secured against your home. This increases the risk of losing your property if you can’t meet the repayments. If you default on the loan, both the first mortgage lender and the second charge lender can take action to recover their money, which could result in your home being sold.
3. Fees and Charges
There are often additional costs involved with second charge loans, including fees for property valuations, arrangement fees, and legal costs. These upfront fees can add up, making the loan more expensive than it might seem at first glance. It’s important to factor these into your decision to ensure it’s still the most cost-effective option for you.
Types of Second Charge Loans
1. Fixed Rate
With a fixed rate second charge loan, the interest rate stays the same for the entire loan term. This means your monthly repayments will always be the same, making it easier to budget since there are no surprises with fluctuating costs. Fixed rate loans are ideal if you prefer stability and want to avoid any potential increases in interest rates over time.
2. Variable Rate
A variable rate second charge loan means the interest rate can go up or down based on market conditions or the lender’s standard variable rate (SVR). While you could benefit from lower rates if market rates fall, there’s also the risk that your repayments could increase if interest rates rise. This option suits those who are comfortable with more risk and prefer the possibility of lower interest over time.
3. Interest-Only
With an interest-only second charge loan, you only pay the interest each month, which makes your monthly repayments lower. However, you’ll need to repay the full amount you originally borrowed at the end of the loan term. This type of loan is usually suitable for those expecting a lump sum in the future, such as from an investment or the sale of an asset, and who can clear the loan in one go when it’s due.
4. Repayment (Capital and Interest)
In a repayment loan (also called capital and interest), your monthly payments cover both the interest and a portion of the loan amount you borrowed. This means you’ll gradually reduce the overall loan balance over time. By the end of the loan term, the debt will be fully paid off. This option is ideal if you want to slowly pay off the loan and don’t want to face a large lump sum payment at the end.
Why Use a Second Charge Loan?
1. Retain Existing Mortgage Terms
If your current mortgage has a low interest rate, or if you would face high penalties for early repayment, a second charge loan allows you to borrow more money without having to change your first mortgage. This can be useful if you’ve locked in a good deal on your first mortgage and don’t want to risk losing those favourable terms by remortgaging.
2. Insufficient Further Advance
Sometimes your existing mortgage lender may not be able to offer you enough money through a further advance on your current mortgage. In this case, a second charge loan can bridge the gap, giving you the extra funds you need while keeping your primary mortgage unchanged.
3. Higher Loan Amounts
Since second charge loans are secured against your property, they often allow you to borrow more than you could with an unsecured personal loan. This can be helpful if you need a significant amount of money for things like home renovations, debt consolidation, or large purchases, and a personal loan wouldn’t provide enough funding.
Final Thoughts
Second charge loans offer a flexible financing option for homeowners needing access to additional funds while keeping their primary mortgage intact. However, they come with higher interest rates and additional risks. It's crucial to carefully assess your ability to meet repayment obligations before proceeding.
Ready to unlock your property's potential?
If you think a second charge loan might be the right solution for you, we recommend you get specialist advice to help you understand the process and find the best option for your needs.
At L&C Mortgages, we specialise in a wide range of mortgage products, but we do not advise on second charge loans. To ensure you receive the best guidance and support for your project, we have partnered with Propp, an expert in specialist property finance. Propp is an award-winning specialist mortgage broker with extensive knowledge and experience to help you secure the right funding tailored to your specific needs.
How can Propp help me compare rates for specialist mortgages?
Propp offers a comparison tool that shows you the latest rates for specialist mortgages and property finance, helping you find the best deal for your needs.
What is Propp's deal optimiser service?
Propp’s deal optimiser service gets specialist lenders competing for your business, ensuring you receive a bespoke quote tailored to your needs.
How does the application process work with Propp?
Propp's underwriters work with you to complete your application quickly and efficiently, ensuring a smooth process from start to finish.
Important Note on Broker Fees
Unlike L&C Mortgages, Propp does charge a fee for its service. For expert advice on second charge loans, we recommend you contact Propp, who will clearly explain their fees and service before you commit to using them.
Specialist mortgage advice is provided by Propp, who are authorised and regulated by the Financial Conduct Authority (914408). Propp is not a part of L&C, nor is L&C a part of Propp.
L&C receives a % of the commission that our partner Propp earns. All applications are subject to lending and eligibility criteria.
Propp is a credit broker, not a lender, that works with the whole of the market.
