Second Charge Mortgage Affordability
The term second charge mortgage refers to a loan taken out in excess of your primary, existing mortgage. This second mortgage will invariability be sought from a separate mortgage lender than the first.
A second charge mortgage or second mortgage can be a quick and effective way to raise money for a specific reason, such as paying for home improvements or if the homeowner decides to consolidate debt.
It is not without risk, however. Unlike the first charge mortgage, which is used to help purchase a property, a second charge mortgage is secured against said property. This means that if you are unable to keep up with repayment, you might stand to lose the property altogether.
A second-charge mortgage is also not quite as simple as borrowing money for an immediate cash influx. For the privilege of taking out a second loan, expect a steep interest rate drawn out over a longer payment period, as well as administrative fees. Let’s take a look at the reality of second-charge mortgage LTV and affordability in the United Kingdom.
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Who Can Take Out A Second Mortgage?
First of all, just who is eligible to apply for a second charge mortgage? Well, any homeowner in the UK can search for a mortgage lender and apply. Hence, second mortgages might also be referred to as homeowner loans. If you own a property to secure the loan against, you can apply; simple as that.
Of course, it isn’t always so easy to find a lender willing to work with you on terms beneficial to both parties. If you have a low credit score or a history of payment difficulties, you might struggle to find a compatible mortgage lender.
How Much Can You Borrow On A Second Charge Mortgage?
The precise amount you can borrow on a second-charge mortgage will depend on the amount of equity tied up in your property. Equity is the percentage of your property you actually own, as in how much of the first mortgage you have paid off.
Every second charge mortgage lender will have their own protocol, but the rule of thumb for a reputable lender will deduct the amount of money still to pay on your first charge mortgage from the total value of your property. The remaining figure indicates your maximum second-charge mortgage amount.
Note that a second-charge mortgage lender will nearly always set a cap on the amount instead of having your loan secured against all your home equity.
The more equity you have, the greater the loan amount on your second-charge mortgage. Therefore whether or not you can feasibly afford this additional loan might depend on what percentage of your existing mortgage is still to pay.
Can you use a second-charge mortgage to buy a second property?
The circumstances surrounding a second-charge mortgage change a little if you are looking to use one specifically to purchase a second property, likely as a buy-to-let property. In this scenario, you will be expected to prove to the second-charge mortgage lenders that you can afford their mortgage payments in addition to your existing mortgage payments.
There are two ways to look at this type of second mortgage lending. On the one hand, if you are asking for the second charge to purchase a buy-to-let property, then you will be generating income by letting out that property. This type of second charge is attractive to many lenders because there is a clear-cut source of income for monthly payments.
On the other hand, if your plans fall through or your personal circumstances change, then you are faced with two mortgages and two sets of monthly mortgage repayments, which is a lot.
For this reason, any reputable second-charge lender will likely expect you to place a cash down payment on this second property before they agree to use your initial property for a secured loan. Expect to be asked for a down payment of 20% or more.
How much can you borrow to buy a second property?
There is no definitive answer, but the amount available to you as a second mortgage secured loan will be determined by the amount of home equity you have as well as your debt-to-income ratio (more on this later).
Experienced second mortgage lenders will assess your mortgage affordability and determine whether they think you will be able to keep up with monthly mortgage repayments.
The Cost Of A Second Charge Mortgage
Alright, the big question: how much does a second charge mortgage cost? When deciding whether or not to apply for a second-charge mortgage or loan secured against your home or property, you need to know for sure that you can actually afford it.
A second mortgage differs from a first-charge mortgage because the repayment period is longer, and the interest rates are higher. The exact interest rate will be determined by how much money you borrow on your second loan and how great a risk the lender perceives you to be.
You can reduce the interest rate of this second mortgage by paying off a higher percentage of your first or current mortgage. Easier said than done, yes, but ultimately it comes down to equity. The more home equity you have, the lower the interest rate, and the more affordable your second mortgage is going to be.
What if you have no equity?
One of the greatest lures of a second mortgage or homeowner loan is that more homeowners can actually apply for one, even if it takes a little time.
A homeowner who has not paid back enough of their current mortgage to earn any home equity might be able to take out a non-equity loan secured against their property. However, these rates will not be the best since the second lender risks losing out if the homeowner fails to retain monthly payments.
How can a mortgage broker help?
An experienced mortgage broker might be able to help, especially if you do not hold sufficient equity to have your ideal pick of second-charge mortgages.
A mortgage broker at LoanCorp will be able to source the ideal lender of second-charge mortgages tailored to your specific financial circumstances. They know who to ask and how to ask it, and often, they know people in the know as well.
If you, the homeowner, approached a lender directly, the chances are you will be presented with their standard rate of second-charge mortgage, but nothing more. Everything is done on their terms, and you might not be able to afford their terms. Mortgage brokers are often able to source better rates not made available to the public.
Regardless of your eligibility for second-charge mortgages and the amount of equity you hold, working with a mortgage broker is the ideal way to ensure you get the best interest rates out there.
How To Tell Whether You Can Afford A Second Charge Mortgage
If the amount of positive equity you hold outweighs the amount you would like to borrow as a second-charge mortgage, then yes, you can probably afford to start looking at second-charge mortgages.
Equity aside, you can realistically consider a second mortgage if you maintain a steady job with a reliable source of income which is greater than your average monthly expenditure. A mortgage lender will figure this out as part of an affordability assessment before they agree to lend you any money.
Debt to income ratio
Another major factor when deciphering second-charge mortgage affordability is the debt-to-income ratio (DTI). This refers to the amount of your monthly income, which goes directly into monthly repayments and clearing your debt.
Obviously, a DTI will be largely controlled by the homeowner’s monthly income and existing debts, but it is also used by lenders to establish risk. When applying for second-charge mortgages, or even just personal loans, the lender will be looking for a 10-20% DTI. This demonstrates that the borrower does not have too great a debt for their current income.
Generally speaking, a 40% DTI is the maximum a homeowner can have when seeking out second-charge mortgages or secured loans, but each lender might be more or less strict.
Second Charge Mortgage Affordability For Bad Credit Rating
You might be drawn to second-charge mortgages or secured loans because a low credit rating has closed off other preferable options.
Well, the good news is that this avenue remains open even to homeowners without the ideal credit history. The not-so-good news is that you can expect your interest rate to be substantially higher.
A second-charge mortgage might be the only solution to an otherwise inescapable problem; just make sure never to borrow more than you can realistically pay back. This is where a mortgage broker can help out by sourcing a loan which you can realistically afford.
FAQs
What is the difference between a first charge and a second charge?
This just means the first and second mortgages.
- The first charge is the original mortgage a homeowner takes out to buy their property.
- The second charge is an optional, additional loan taken out using the property as collateral. It will co-exist with the first mortgage, though they are not connected.
Are there alternatives to a second-charge mortgage?
Yes, there are plenty of alternatives to taking out a second-charge mortgage.
- Personal loans and credit cards are excellent alternatives as they are unsecured, meaning you do not risk losing your property if you fail to meet monthly repayments. These loans typically have a lower cap, so you cannot borrow as much, and they come with a steep interest rate.
- Homeowner loans are available for borrowers looking for a little extra cash to conduct necessary home improvements or repair work. These are excellent alternatives as they can be secured loans or unsecured loans. You might get a better rate if you secure the loan against your home, but if the risk is too high, unsecured borrowing is a safer bet.
- Home equity loans are incredibly similar to second-charge homeowner loans. They use the positive equity in your home as collateral. The more equity you have to use, the lower the interest rate. While mortgages are typically only available via a bank or building society, home equity loans have a greater choice of lenders.
Final Thoughts
Taking out a second charge mortgage is not something to consider lightly. You run the risk of losing your property if you fail to keep up with either of your mortgage repayments.
A second-charge mortgage can still be an excellent option, however, provided you only borrow the amount you can realistically repay.
So, how much can you afford to borrow? Well, calculate the amount of equity you have earned from paying off your first mortgage. The more equity you have, the more money you can afford to borrow. Second, take a look at your debt-to-income ratio. If most of your monthly income is being swallowed up by debt, can you really afford to add more debt?
If the amount of equity you hold outweighs the amount of money you would like to borrow, and your debt-to-income ratio is no more than 40%, then chances are you can afford to take out a second-charge mortgage.
Whatever your financial situation, working with a LoanCorp mortgage broker will ensure that you get the best rate possible and that you take out the second-charge mortgage you can afford to repay so contact us now.