Perhaps it’s no surprise with a cost of living crisis raging, but growing numbers of homeowners are opting to saddle themselves with a second mortgage.
Many people are using the money to pay off debts such as credit cards and personal loans.
Others are using the cash to finance everything from home improvements and paying for a wedding to starting a business and even paying a tax bill.
According to industry data, there has been strong growth in second charge mortgage lending. Just over 2,800 second mortgages, with a total value of £133m, were taken out by homeowners in May this year. That is 43% higher by number, and 53% higher by value, than in May 2021.
The mortgage broker John Charcol says it is experiencing an increase in demand as borrowers look to rustle up additional capital.
A second charge mortgage is a loan that allows you to use any equity you have in your home as security. It effectively sits on top of your existing mortgage.
You usually get one from a separate lender – there are a number of specialist firms. It means you will have two mortgages on your home. However, the existing mortgage will always take precedence over the second home loan.
As with any mortgage secured on your property, failing to repay it could mean you will lose your home.
For many homeowners who need to raise extra cash, it is probably a better idea to simply remortgage, or to take out a further advance from the same lender. Or, depending on the circumstances, take out something such as a personal loan.
But for some it would not make sense to refinance their main mortgage – for example, they might be on a particularly good deal or only recently signed up for a five- or 10-year fixed-rate deal. Meanwhile, others don’t have those options available.
That is where second mortgages can come in – although taking one is a big step.
There are several reasons why someone might sign up for one. If your existing mortgage has a high early repayment charge, it might be cheaper to take out a second charge mortgage rather than remortgage in order to release equity from your home, says the government-backed MoneyHelper website.
Meanwhile, for some people – for example, those whose credit rating has got worse – refinancing their main mortgage could mean they are required to pay a higher interest rate on the whole thing, which would mean paying more interest overall. Taking out a second mortgage means only paying the higher rate and extra interest on the new amount you want to borrow.
Another category of person who might opt to take out a second mortgage is someone who is self-employed and struggling to get access to unsecured borrowing, such as a personal loan.
“There is a growing demand for second charge mortgages,” says Nick Mendes at John Charcol.
One of the most common reasons why someone might consider one is that their current mortgage lender won’t allow them to raise any additional funds, he says.
“Second charge lenders often have a more favourable lending/borrowing appetite,” Mendes adds.
Even though it is secured against your home, you can spend the money as you wish.
In terms of what people do with the cash, home improvements was traditionally the number one use. However, the Finance & Leasing Association recently indicated that many people are doing it in order to consolidate their debts.
But that is likely to mean people are converting unsecured credit into secured credit, and if they don’t pay their second mortgage, the lender could start possession proceedings.
Just as with standard mortgages, rates on second mortgages have been climbing. As recently as January this year, second charge interest rates were as low as 3.95% but about 5% is more like the typical starting point now, Mendes says. Some firms will charge quite a bit more than that.
“The interest rates can be a lot higher than for first mortgages,” the MoneyHelper site says.
It adds: “If you need to borrow a small amount of money, you might be better off going for an unsecured product such as a personal loan.”
Lenders offering second charge mortgages include Shawbrook Bank, West One, United Trust Bank, Pepper Money and Oplo.
The affordability requirements for second mortgages can be less onerous than for standard home loans. “Income affordability is slightly more generous for both employed and self-employed,” Mendes says.
Meanwhile, many second charge lenders will allow you to make overpayments or offer other flexible features.
However, this is one of those areas where it can really make sense to talk to a mortgage broker who can look at your whole financial situation and individual circumstances to see what would be best for you.
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