Homeowner loans, secured loans and second charge mortgages; surely they’re all different things?
Well, actually, they aren’t; in fact, they’re just different names that describe the same type of borrowing.
A second charge mortgage is a second mortgage that sits behind your main mortgage and is secured against your home. If you don’t keep up with your loan repayments, the lender has the right to sell the property to reclaim what you owe them – so be certain you can afford your repayments before you apply.
Now, let’s look at how much you can borrow.
Equity in your home
If you are making plans for a big home improvement, thinking about consolidating your debts or looking to make an expensive purchase and want to spread the cost, a second charge mortgage may provide you with the money you need. This type of loan is secured against the equity in your home, and it’s this equity (among other things) that determines how much you can borrow. So what exactly is it?
Equity is the amount that’s left over when you take away the balance you have outstanding on your mortgage from the current value of your home. Known as the loan-to-value (LTV), the higher the percentage of your share of the equity, the more you should be able to borrow – although factors like your income and credit history will also be considered.
Let’s look more closely at LTV:
Working out your LTV
When you apply for a second charge mortgage, lenders will work out your home’s LTV and use this to decide how much you can borrow. They will value your property in the current market (rather than look at what you paid for it) and compare this to the amount you have left to pay off on your mortgage. For example, if your home is worth £150,000 and you owe £50,000, your loan to value ratio is 33%.
The smaller your LTV, the better the rate you should be offered by lenders. That’s because a small LTV suggests you don’t have a lot left to pay back on your mortgage, so taking on a new debt shouldn’t overload you with repayments. If you still have a large chunk of your mortgage outstanding and your LTV is high, it’s likely you won’t be able to borrow as much or get a competitive rate. Generally speaking, the best second charge mortgage rates are available to homeowners with an LTV of 60% or less.
What else will a lender look for?
As we mentioned above, the LTV of your home is not the only factor a lender will consider when you apply to them for a second charge mortgage. They will also look at your income. This is done to check that you have enough coming in to comfortably afford your repayments.
Lenders will also look at your credit history when you apply. This is a record of the credit you’ve taken out over the last six years and how well you’ve managed it. If a lender feels you currently have a lot of credit to juggle, it may influence their decision on whether to lend to you.
Can you afford to borrow?
It’s not only the lender who will carefully consider whether or not to accept your second charge mortgage application, but you too should think about it carefully before you apply. Because the consequences of not keeping up with your second charge mortgage payments are serious – you could lose your home if you fall behind – you need to be sure you can comfortably afford them.
You’ll also want to be certain that you won’t overstretch yourself. If you’re already making repayments on several different lines of credit, taking out another loan at this time might not be the best plan.
If you’ve gone over your finances and feel comfortable you can afford the repayments on a second charge mortgage, why not get in touch with our team at Ocean loans? You can use our Smart Search tool to get an idea of whether you’ll be accepted before you apply – and checking this won’t affect your credit history.
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