A homeowner who wants to raise additional money may consider replacing the existing mortgage with a larger one.
That is not the only possible route.
A second-charge mortgage can provide additional borrowing while leaving the original mortgage in place. This may be worth considering where the existing mortgage has a competitive rate, a significant early repayment charge or other features the borrower would prefer to retain.
However, a second charge can have a higher interest rate and additional fees. The correct comparison must consider the complete cost and risk of both arrangements—not simply which produces the lower immediate monthly payment.
What is a second-charge mortgage?
A second-charge mortgage is a separate loan secured against a property that already has a first mortgage.
The borrower retains the original mortgage and makes a separate payment to the second-charge lender. If the property is sold, the first mortgage lender has priority over the sale proceeds before the second-charge lender is repaid.
The amount available can depend on:
- The property’s value
- The existing mortgage balance
- The combined loan-to-value
- The applicant’s income and expenditure
- Credit history
- The proposed borrowing purpose
- The required term
- The lender’s criteria
Although the loan is described as a second charge, the security risk is real. Failure to maintain the payments could ultimately put the property at risk.
What happens with a remortgage?
A remortgage replaces the current mortgage with a new mortgage, usually from a different lender.
The new loan repays the existing mortgage and provides any agreed additional borrowing. The borrower then has one mortgage payment rather than separate first- and second-charge payments.
This can appear simpler and may provide access to a lower interest rate on the additional borrowing. However, the new rate applies to the complete mortgage balance.
A borrower with a particularly competitive existing mortgage could therefore give up that rate on a substantial loan simply to raise a much smaller amount.
When might a second charge deserve consideration?
A second charge may be worth examining where:
- The existing mortgage has a low or competitive rate
- A substantial early repayment charge would apply
- The current lender will not provide the required additional borrowing
- The applicant’s circumstances do not meet the criteria of a suitable remortgage lender
- Funds are required before the existing product ends
- Replacing the complete mortgage would create a higher overall cost
- The borrower needs the two loans to have different terms
Imagine a homeowner has a large mortgage on a favourable fixed rate and wants a comparatively small amount for home improvements. Remortgaging the complete balance could increase the interest charged on all the existing borrowing.
A second charge would preserve the first mortgage, although the rate and fees on the additional loan might be higher.
The figures must be calculated rather than assumed.
When might remortgaging be preferable?
A full remortgage may be more suitable where the current mortgage is approaching the end of its product period, the early repayment charge is small or absent and a suitable new lender can provide the complete borrowing required.
It could also be worth considering where the applicant wants:
- One mortgage and one monthly payment
- A different repayment method
- A longer or shorter overall term
- A new fixed-rate period
- Additional borrowing at a first-charge mortgage rate
- To change lender because the existing product is no longer competitive
The borrower must still meet the new lender’s affordability, credit and property criteria. A remortgage is a new application, and acceptance by the current lender does not guarantee approval elsewhere.
Compare total cost—not just the rate
The lowest advertised interest rate does not necessarily represent the cheapest route.
For each option, compare:
- Interest rate
- Monthly payment
- Loan term
- Product or arrangement fees
- Advice and administration fees
- Valuation and legal costs
- Early repayment charges
- Fees added to the borrowing
- Total amount repayable
- Cost over the period the loan is expected to remain in place
A second charge taken over a long term may create an affordable-looking monthly payment while substantially increasing the total interest paid.
A remortgage could have a lower rate but become more expensive once an early repayment charge and the cost of replacing the existing mortgage are included.
The two loans may also end at different times. A borrower should understand how a future remortgage, house move or sale could be affected by having both charges secured against the property.
Affordability applies to both routes
Available equity does not establish that the additional borrowing is affordable.
The lender will consider income, existing mortgage payments, loans, credit cards, household expenditure, dependants and the possible effect of higher interest rates.
For a second charge, the assessment must account for both mortgage payments. For a remortgage, it will consider the payment on the complete replacement loan.
Borrowers should use realistic expenditure figures and retain sufficient monthly flexibility for repairs, emergencies and changes in income.
A lower payment achieved by extending borrowing over many more years should not be mistaken for a lower overall cost.
Be particularly careful with debt consolidation
Some borrowers use secured borrowing to repay credit cards, personal loans or overdrafts.
This can reduce the monthly payment, but it converts previously unsecured debt into borrowing secured against the home. Extending short-term debts across a mortgage term can also mean paying interest for considerably longer.
Before consolidating debts, establish:
- The balances and settlement figures.
- The current interest rates.
- Any early settlement charges.
- The proposed secured-loan term.
- The total amount repayable.
- Whether the original cause of the debt has been addressed.
- Whether the new payment remains affordable.
Clearing credit cards through a mortgage does not solve an underlying budget problem if the cards are then used again.
Consider the alternatives
A second charge and a remortgage are not the only possible options.
Depending on the amount required and the borrower’s circumstances, alternatives may include:
- A further advance from the existing lender
- An unsecured personal loan
- Using savings
- Delaying the expenditure
- Waiting until the current mortgage’s early repayment charge ends
- Reducing the amount to be borrowed
A further advance leaves the main mortgage in place but adds borrowing from the same lender, often on a separate product. Its rate, term and expiry date may differ from the original mortgage.
Each route should be assessed on a like-for-like basis.
Start with the purpose of the borrowing
Before comparing products, establish exactly how much is required, why it is needed and how quickly it must be available.
The most appropriate route may change according to the intended purpose, existing mortgage, early repayment charge, required term and likely future plans.
NetRent Mortgage Solutions can help borrowers examine the available options and arrange for qualified mortgage advice through our mortgage partner, DNA Financial Solutions.
To discuss a second charge, further advance or remortgage, contact NetRent:
Telephone: 01352 721300
Email: mortgages@netrent.co.uk
NetRent does not provide legal advice. This article represents our general understanding of the mortgage market and is provided for information only.
Mortgage products, rates, fees, affordability calculations and lender criteria can change. Appropriate regulated mortgage, financial, legal and tax advice should be obtained before proceeding.
Your home may be repossessed if you do not keep up repayments on your mortgage or other borrowing secured against it.