What is additional secured borrowing?
Additional secured borrowing is when you take out further borrowing against an asset that is already being used as collateral. The best example of additional borrowing is a secured loan (also known as a homeowner loan) that’s tied to your home, when you already have a mortgage on your property.
For most people in the UK, buying a home requires a mortgage. Mortgages are a method of borrowing money specifically for the purpose of buying a property. This type of borrowing is known as a ‘first charge’.
‘Charge’ is the word for the lender’s legal interest; this gives the lender the right to recoup their losses from the sale of your home (as a last resort) should you fail to make your repayments. So, a mortgage is known as the first charge because it is literally the first legal interest in the property from a lender.
If you take out additional secured borrowing, such as a secured loan, it will be known as a second charge (or sometimes ‘second charge mortgage’) because it’s the second form of borrowing against your property.
Charges are arranged consecutively, meaning that any proceeds from the sale of your house would be shared in the order the loans were given. So, your mortgage would take priority, ahead of your secured loan.
Remember, even though both loans are secured to your home, the repayments will have to be made separately as they are two different forms of credit. Make sure you can afford to pay for a secured loan on top of your mortgage before you apply. By borrowing more, you may be extending the term and increasing the amount you repay in total.
What are the benefits of a second charge mortgage?
As second charge mortgages are secured to your home, they come with additional benefits that you can’t get with unsecured borrowing:
- you can borrow larger amounts – the exact amount you can borrow will depend on your affordability and the equity you have in your home, but you can generally borrow much larger amounts with second charge mortgages (up to around £250,000)
- interest rates can be lower – this is because your home is used as collateral, which reduces the risk to the lender (in terms of them getting their money back)
- you don’t have to have a perfect credit score – because the lender has your home as security, they’re more willing to lend to those with less-than-perfect credit scores
While these benefits can be enticing, it’s important to remember that the reason they exist is because the loan is tied to your home, which means that your home could be at risk if you can’t make your repayments. So it’s important that you can afford the repayments both now and in the future.
Can I put a second charge on a property?
Whether you can put a second charge on your property depends on several factors including your eligibility criteria and the equity you have in your home. Let’s explore these in a bit more detail.
To qualify for a second charge mortgage, you’ll need to get permission from your mortgage provider, plus you’ll need to meet the specific criteria set by the new lender.
While different lenders will have different criteria they look for in applicants, they all share some fundamental elements. These are:
- home ownership – this is an obvious one, but to qualify for a second charge mortgage, you have to own a property with a mortgage attached to it. (If you have paid off your mortgage, you could look to remortgage instead, or consider unsecured borrowing)
- affordability – lenders will look at your income and outgoings in detail and assess whether they think you can afford to take out second charge mortgage
- credit history – while you don’t have to have a perfect credit score to get a secured loan, lenders will still look at your credit report to assess your credit history
- debt-to-income ratio – this compares your earnings with your debt, and lenders use it to assess your ability to manage monthly repayments
In theory, as long as you meet the lender’s specified criteria, you should be able to get a second charge mortgage. It’s a good idea to check your eligibility before you apply by using an eligibility checker. This way you can get a good idea of whether you’ll be approved before you apply, which reduces the risk of damaging your credit score by being rejected and making multiple applications.
One of the biggest influences on your eligibility for a second charge mortgage is the level of equity you have in your home.
Equity is what’s left when you take away your outstanding mortgage from the value of your property. This is important as it impacts the loan-to-value (LTV) ratio, which is how lenders determine their risk.
Theoretically, the higher your equity, the lower your LTV, the better your deal. Typically, the best deals are available to people with at least a 40F share of the value of their home.
Will a second charge mortgage hurt my credit?
When you apply for any form of credit, it will cause a temporary dip in your credit score. However, your score should recover quickly if you pay all your outgoings on time, every time. In fact, your rating should improve gradually if maintain your second charge mortgage repayments.
Bear in mind though, missing just one payment can harm your credit. So, you need to make sure you can afford to take on a second mortgage on top of your other outgoings.
What are third charge loans?
A third charge secured loan (typically referred to as a ‘third charge mortgage’) is another loan, on top of your first and second charge mortgage, that is secured to your home. These types of loans are fairly rare due to the risk involved, but they do exist.
Can you get a third charge mortgage?
Whether you could get a third charge mortgage would depend on your eligibility as well as the remaining equity you have in your home after the first and second charge mortgages.
As charges are ranked in consecutive order, the risk to third charge lenders is higher, because there are two other loans that would take priority if your property was sold.
As such, the eligibility criteria for third charge mortgages tends to be very strict, and the interest rates are normally higher than on second charge mortgages.
Factors you need to consider before you apply
When you get a second charge mortgage, you put your home at risk if you stop making repayments. As such, it’s essential you carefully consider whether it’s the right thing for you and your situation before you apply. Consider whether:
- you can afford the loan – if you make your budget and there’s only just enough left over to cover your repayments, then it may not be worth the risk
- you really need the loan – is it essential that you borrow the money, and if it is, do you have to do it right now, or could you save up instead?
- it’s worth the risk – this is perhaps the most important; while it’s only ever a last resort, there is a risk you could lose your home if you borrow money against it, so really consider if it’s worth it
You could also consider alternatives to additional secured borrowing. Perhaps a personal loan or a credit card may be enough if you’re looking to borrow a smaller amount. These unsecured forms of borrowing don’t require any collateral. Whatever you choose, be sure that it’s the right option for you and that you can make your repayments.
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