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Remortgage or second charge mortgage - what's the difference?
If you own a property and are looking to borrow some more money, the good news is that you often have more options for how you can borrow than those who aren’t yet on the property ladder.
That’s because being a homeowner allows you to take out secured lending products as well as unsecured ones. So - like your current mortgage - any borrowing you take out in this way is secured against your home.
There are plenty of options for taking out secured lending but in this blog, we’ll talk you through specifically when you might want to remortgage and when you may decide to take out a second charge mortgage.
What is a second charge mortgage?
A second charge mortgage is simply another name for a homeowner loan.
It is a loan that’s secured to your property. If you stop making your repayments, the lender has the right to repossess the property from you in order to get back what they owe. You must therefore be sure you can afford the repayments before you take out the loan.
On the plus side, because the loan is secured to your home, it’s often possible to borrow more than you could with a personal loan. Plus, you can spread your repayments out for longer to make them more affordable.
The amount you’ll be able to borrow with a second charge mortgage is determined, in part, by how much equity you have in your home.
Once you take out the loan, the payments will be totally separate to your mortgage payments and your mortgage will take priority, but it’s still vital you don’t miss your loan repayments.
Have a look at our loan calculator to get an idea of how much you could pay each month for the loan you want.
Okay then, so what’s a remortgage?
On the other hand, you can choose to remortgage. This means taking out a new mortgage of the value of your current mortgage plus the extra you’re looking to borrow.
So rather than having two separate products – a mortgage and a loan – you have one mortgage that you extend to give you the extra cash you want. This might make budgeting and managing your repayments more straightforward.
For example, if you had £75,000 left to pay on your mortgage and you wanted to borrow £25k, you’d be remortgaging for £100,000. You’d then use the new mortgage to clear the £75k balance on your current one and you’d be left with the £25k extra that you wanted to borrow.
There are important things to consider with remortgaging. For example, if you choose to settle your mortgage early, you may incur an early repayment fee from your current lender – and this can be quite high.
You will also lose your current mortgage deal, so if you’re happy with the set-up you’ve got then you might have to think hard about remortgaging. Of course, this may swing the other way too. You may end up finding a better deal, so take your time before you jump into anything.
And make sure you do bear in mind those early repayment fees. Although it might look like a good deal on the surface, if you have to pay a large early settlement fee then remortgaging may be an expensive way to borrow.
Pros and cons
As we’ve briefly touched upon, there are pros and cons to both taking out a second charge mortgage, and remortgaging.
Both are secured against your home, so either way your home is at risk if you don’t keep up your repayments.
However, if you take out a second charge mortgage this will always be second priority to your first one, so if you did ever find yourself struggling to repay, your first mortgage would take priority. Plus, you wouldn’t need to change your current mortgage so you wouldn’t need to worry about an early redemption penalty.
We hope that’s helped answer any basic questions you’ve got about second charge mortgages and remortgaging. If you’re unsure as to what’s best for you, we’d recommend speaking to a financial advisor.