When is a second mortgage – or second charge mortgage – a good idea, and could second mortgages save you money if you're a home owner? Remortgaging is often the natural choice when a home owners comes to the end of their fixed-term deal, but what if you're mid-term, need extra cash, and would be stung by early repayment charges? Or, perhaps your financial circumstances have changed since you taking out your first mortgage, and you aren't able to access the best mortgage rates?
We explain how second mortgages work and who they may be for – particularly in the post-Covid world of mortgages.
1. What is a second mortgage?
A second mortgage is basically a secured loan against the equity you already have in your home. Typically, the value of a second mortgage starts at £1,000, up to the total value of the equity you have. For example, if your current mortgage has a value of £500,000 and you've paid off £200,000, then you can take a second mortgage against the £200,000.
2. Who is eligible for a second mortgage?
You must already be a home owner, obviously, but you also will have to go through the same assessment, including stress testing, as you did for your first mortgage. In fact, you will have to prove to the lender that you can make repayments on both your first and your second mortgage, which is something to bear in mind before you apply.
3. Why would I want a second mortgage?
There are several scenarios where a second mortgage could actually be financially beneficial. They are:
- Your employment status changed since taking out your mortgage: if you took out your first mortgage while in full-time employment and have since become self-employed, you might find that you're struggling to get an unsecured or personal loan. A secured loan or second mortgage can be the solution, particularly if you wanted the loan for the purpose of home improvement.
- You can't access the best remortgage rates: if, for whatever reason, your credit rating has gone down since taking out your first mortgage, it may well work out to be cheaper to keep your existing mortgage and take out a second mortgage.
- You want to remortgage but are un the middle of a long fixed term – this will especially apply to those whose mortgage are fixed for five years or longer. If remortgaging would set you back many thousands, then, even with the interest and fees you'll pay for the second mortgage, you could save.
4. When are second mortgages a bad idea?
There are several scenarios, however, where taking out a second mortgage could backfire. They are:
- Taking out a very small second mortgage: taking out a very small secured loan over a long period of time could see you end up repaying more in interest that the loan itself. If you need a small amount of cash for a kitchen renovation (for example), consider a different loan type
- Using a second mortgage to consolidate debt: if you're applying for a second mortgage in hopes of repaying credit card debt, there are two issues with this. The first is that a mortgage typically has a long term, and, although mortgage rates are much lower than credit card rates, if you stretch the loan over a very long period of time (say, a 25-year term), you will end up paying more interest than your credit card debt, unless you're able to pay off the second mortgage early. The second potential issue is that you're converting unsecured debt into secured debt, raising the possibility of your home being repossessed if you can't make repayments.
5. What are the alternatives to second mortgages?
As you can see, second mortgages can work in your favour – if you get the numbers right. If the loan you need is really quite small, you might be better off trying to get a personal (unsecured) loan from the bank, or a zero-per-cent credit card to cover the costs of your project.
You also need to be sure that a second mortgage, combined with your first mortgage, would give you an advantage over remortgaging. Even if you believe that you won't get a good remortgage rate, speak to a mortgage broker first.
We've teamed up with Habito: use their mortgage comparison tool below to begin a conversation about what rates you could access as an existing home owner.