The Mortgage that you get to buy a property are usually 99.8% registered as a first charge , this means this mortgage will have the main priority in getting the lenders money back if the property is ever repossessed . If you own a property and it is worth more than the mortgage that is placed on it this is called equity. It is possible to borrow money against this equity by remortgaging the property with another lender who will pay off the existing lender and register their charge as a first charge. You can approach the existing lender for a further advance that will be register with the main mortgage as a first charge.
The other option is to secure a loan on the property on top of the mortgage, this is what is called a second charge mortgage or loan, and it has second priority to the original mortgage and is paid off after the mortgage if the property is repossessed, this means securing the loan as a second charge is a lot more risky due to having priority after the main mortgage, if the property needs to be repossessed and the equity has been eroded by a recession or a major event in the property market the second charge lender might not be able to recover its money . For this reason the interest rate on second charges are greater to cover the extra risk of the higher prospect of not getting all or none of the money back in the event of repossession.
Second charges were free off regulation before 21st March 2016, but now they are regulated by the FCA and are afforded the main strict affordability checking a first charge mortgage is subject to. When borrowing as a second charge the cost of the first charge mortgage payments, all the other expenses for cost of living and other credit cards and unsecured loans , so it might be less affordable to take out a second charge mortgage than it would be to take a further advance or remortgage .
Second charge mortgages usually go anywhere from a loan of £1000 right up to £250,000 and beyond depending on available equity in the property. The second charge lender will work out how much equity is left after the mortgage and second charge is put on the property, this is usually down to many factors, the type of security, the credit status off the applicant and the amount being borrowed.
Advantages of a second charge
1. If you have a very good rate with your existing mortgage and remortgaging would mean you losing this rate then a second charge might be a better option.
2. If you have acquired bad credit after taking your original mortgage, it might be easier to get a second charge other than re-mortgaging as second charge lenders do offer in some circumstances a wider range of products for adverse subprime clients.
3. In most circumstances getting s second charge completed is quicker than remortgaging as many of them offer an in-house legal service that is included in the price of the second charge package , so you are not relying on a third party solicitor to complete the matter .
In summary getting professional advice on the best option is always advised.
