You must have taken a mortgage to finance a house or property in the UK you want to live in or rent out. You should have also started repaying this long term loan and built up a fair share of equity. There are many reasons why homeowners might need some extra money and at such times, the question arises whether to remortgage and save or take on a second mortgage without giving up the first. Both are preferred by thousands of UK homeowners to suit their circumstances. We tell you about how taking an additional loan on your property works and whether it’s the right choice for you.
What Is A Second Mortgage?
Many people use a second mortgage in place of remortgage to raise money for various purposes. It’s a secured loan of £1,000 and above taken against the equity you have in your home. Equity is the difference between the total value of the property minus the mortgage you owe on it. Now, it makes no difference whether you live in the said house or have leased it for a monthly rental income. However, you should be the owner of the house. You’ll have to repay two mortgage loans every month if you opt for a second mortgage, as it doesn’t replace the original one like in remortgage.
Why Do People Think of a Second Mortgage?
People who want quick access to money and don’t or can’t wait to save up usually think of a second mortgage. Other reasons include:
- Self-employed people struggling to get any form of unsecured borrowing
- Their credit rating has gone down since their first mortgage. They want to pay interest only for the amount they borrow and not the whole mortgage
- If their mortgage has a high early repayment charge, it’s better to keep it and simply go for a second mortgage
- They want to raise money for improvements or modifications to their interiors
- They’re looking at consolidating their debts
- A family member is seriously ill and there’s no money to pay for hospital
Can I Get A Second Mortgage?
Due to stringent UK rules, lenders must compulsorily conduct the same affordability check and ‘stress test’ they do for first charge residential mortgage borrowers. Every second mortgage lender has to comply with the laws governing mortgage advice, responsible lending and sealing with payment difficulties. If you’re searching for second mortgage loans, be prepared to show evidence that you can repay the loan.
Useful tips for applying for a second mortgage:
- Ideally, reduce your spending and cut down on bills from the previous three months
- Prepare solid proof that your income can cover two current mortgage repayments
- Compare various second mortgage deals for the best one
- Try to repay your first mortgage early if no early repayment charges apply
How Much Can I Borrow With A Second Mortgage On My Property?
Whatever reason you might have for borrowing, how much you can borrow very much depends on the equity you have in your home. For example, if your house is valued today at £200,000 and you have £100,000 of mortgage left on it, your equity comes to £100,000. That’s the maximum sum a loan provider would be willing to lend. That is, you can borrow from 75%-100% of the equity. A word of caution – ask yourself if you’re confident you can manage repayments else you might end up losing the roof over your head.
What If I Move House?
In case you have to sell your home, you’ll have to first pay off the second mortgage or transfer it to a new mortgage loan.
Do High Interest Rates Apply On A Second Mortgage?
Second mortgages usually have higher interest rates. So, you need to consider this before taking on a second debt against your home. If you think a second mortgage isn’t the best choice given your circumstances, you could reduce the borrowing amount, remortgage with lower interest rates or not go for a second home loan altogether.
Can I Use The Money From A Second Mortgage For My Business?
A business is a different ball game and before using your loan for starting a new venture, these questions may help:
- How much will it cost me to set up a new business?
- Do I have a market for my business idea?
- What percentage of profits am I likely to make in the long run?
- Will I need to hire staff e.g. an accountant, bookkeeper or legal advisor?
- Can I afford to manage my business expenses along with two separate mortgages?
Pondering upon these questions will give you the answer.
What Are The Advantages of a Second Mortgage?
A second mortgage is beneficial because:
- It’s not linked to your first mortgage, so your house isn’t directly at risk
- If affordable, it can turn out to be cheaper than a secured loan
What Are The Disadvantages of a Second Mortgage?
Opting for a second mortgage may be risky as:
- It requires you to store up a second deposit
- It’s expensive to pay for two mortgages concurrently
- You aren’t free from strict affordability checks
- If you can’t repay second mortgage, you might have to sell your property
What Is A Binding Offer Made by A Second Mortgage Lender?
When a lender makes a second mortgage offer, they’ll give you a document called a European Standardised Information Sheet (ESIS). This sheet contains:
- A reflection or ‘cooling off’ period
- Terms of the offer
- A few details of your loan application
- Loan features including fees, APRC and changes to monthly repayments if interest rates change
You’ll get a week’s time to think about the offer. Some would also give you a little more time to decide. During this period, the terms of the offer are binding on the lender, except if your personal details are found to be false. If you’re sure you want to take things ahead, communicate it to the lender as soon as possible. Else, you could use this time to compare other deals and lenders.
Why Should I Take Advice Before Settling For A Second Mortgage Deal?
It’s always good to get advice from a qualified financial advisor about the best offers for your needs. They act within the framework of the FCA while dealing with you.
- You can approach your existing mortgage lender and ask them about a second loan
- Shop around and do a comparison of lenders’ APRC, duration of loan and total amount repayable.
- Know the exact mortgage terms, interest rates, fees and early exit charges.