Benefits of Secured Loans & Second Charge Mortgages

Hand with Gold CoinsIf you’re a homeowner looking to raise cash, you could do a lot worse than taking out a secured loan. Your lender can use the equity in your home (15% minimum) as security. They’ll then loan you the agreed amount in the form of a second charge mortgage.

Secured loans often prove a quicker, more efficient way to raise funds than a remortgage. Contractors who “don’t want to go through all that again” will appreciate the convenience.

Lenders consider a wide range of reasons they validate for a second mortgage. The collateral is already there; they just need to prove borrower affordability. This type of borrowing does have its pros and cons; we look at both, here.

Who can benefit from a second charge mortgage?

Lenders secure second charge mortgages against the value of the equity in your home. In theory, it’s the same principle as your first mortgage. Only now, your home will secure two mortgages:

  1. any balance of your original mortgage;
  2. the portion of equity that your home’s accrued against which you now want to borrow.

This can benefit homeowners who need to raise capital without remortgaging their existing mortgage. The first thing any homeowner would think of is to approach their existing lender. Understandable, but not always wise.

This train of thought is also prevalent amongst limited company contractors. They’ve struggled to prove income in the past, so, “not that again, please.”

The problem is that an existing lender may only loan the new funds against a total remortgage. This can be undesirable for the borrower for all manner of reasons. The lender may:

  • impose a higher interest rate for the remortgage than original mortgage rate;
  • insist that the mortgage switch from interest only to a capital and interest (repayment);
  • refuse older borrowers, who no longer pass the affordability tests;
  • spot a change in the borrower’s circumstances, resulting in a reduction in income.

Any or all of these reasons could have a negative effect on the value of the amount you want to borrow.

What are some common reasons for taking out secured loans?

There are many situations that justify taking out a second charge mortgage. Before you commit, make sure you know how much the loan is going to cost you in real terms. Also ensure that you can afford the repayments. Passing a lender’s affordability analysis is one thing. Having enough cash to live a comfortable lifestyle is another entirely.

If you’re happy with the repayments, your second charge mortgage can help you if:

  • you don’t want to extend the term on your current mortgage;
  • you don’t want to or forego the existing low rate on your current mortgage deal;
  • you have a low lifetime interest rate and don’t want to sacrifice it by remortgaging;
  • your credit rating has gone down since taking out your first mortgage;
    • a remortgage could see you paying more interest altogether, not just on the extra you want to borrow;
  • you’d prefer to keep your interest only mortgage, not switch to a repayment mortgage;
  • your mortgage has a high early repayment charge:
    • it may be cheaper for you to take out a second charge mortgage rather than to remortgage;
  • you’re struggling to get an unsecured borrowing (e.g. a personal loan), perhaps because you’re self-employed;
  • your current lender is unwilling to provide the funds that you want to borrow:
    • e.g. you’re using it to invest in a business venture or pay your tax bill;
  • you need to move fast and have funds available post haste:
    • second charge mortgages are often a speedier option than a traditional remortgage.

How do I apply for a Second Charge Mortgage?

As long as you have at least 15% equity in your property, you can apply for a second charge mortgage.

As a contractor or self-employed professional, apply through a mortgage broker. A broker will express your income in a way that underwriters can understand. Limited company accounts are beyond the remit of most in-branch mortgage advisors!

Many second charge providers offer more flexible terms than a first charge mortgage lender. That said, underwriters often assess applications in the same light as a normal mortgage.

They’ll consider the property’s value and condition, applicant’s income and credit rating. And borrowers still have to provide evidence that they can afford to pay back this loan.

When a second charge mortgage works out cheaper than remortgaging; an example:

Here’s the deal. Peter and Samantha took out a £350,000, four-year fixed rate mortgage. It still has two years to run until before their fixed rate deal ends. Estate agents have now valued the house at £500,000. Nice.

They need to borrow £50,000 to refurbish their home, but there’s a problem. Since taking their first mortgage, their credit score has worsened. On that basis, their existing lender isn’t prepared to consider a further advance.

Should they remortgage everything to another lender to raise the additional funds? Or should they take out a second charge mortgage?

The options: remortgage

If they remortgage with another lender, they’ll pay a £12,000 early repayment charge. It’s in the small print of the four-year fixed deal they took out. There’s no way of avoiding that charge besides seeing the four-year deal out. They don’t want to wait that long.

Neither is there a guarantee that they’ll get a more favourable interest rate than the one they’re on. Given their poorer credit score today, it’s likely they’ll pay more.

The options: second charge mortgage/secured loan

They look for a second charge mortgage for £50,000 with another lender. They know that they’ll pay a higher interest rate on that £50,000 than on their first mortgage. They understand that they’ll pay fees for arranging the second charge mortgage, too.

Yet the chances are, the second charge mortgage will work out cheaper. They won’t have to pay £12,000 in early repayment charges. They’ll keep the lower interest rate on their existing mortgage.

Also, a remortgage would be for the balance from their existing mortgage + the £50k they want to borrow. That base sum represents a far greater amount than a second charge over the mortgage term.

Peter and Samantha decide to take out a secured charge loan. The interest rate is higher than their existing first mortgage. But it has no early repayment penalties beyond two years when their main mortgage fixed deal ends.

Doing it this way also gives them options down the line. When the four-year fixed deal ends, they could look to see if they can remortgage both loans. This way, they’ll incur no early repayment fees and maybe get a better deal overall.

Is arranging a second charge mortgage difficult for contractors?

Specialist underwriters don’t discriminate against contractors for second mortgages. But the ‘specialist’ bit is all important. Take your accounts into a High St. branch and you’ll still hear the advisors giggling at you half way up the street.

The self-employed, freelancers and contractors should always use a specialist broker. We, for example, have agreed bespoke underwriting with many specialist lenders.

We go to their underwriting teams direct to negotiate terms for all independent professionals. This relationship then allows contractors to borrow based on their whole annual income.

Even if your contract is for three or six months, we will annualise the amount. This way shows your true affordability, for either a first or a second charge mortgage.

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