Second Charge Mortgage

What is additional borrowing and what types are there?

Additional borrowing is where a client has an existing mortgage and potentially wants to do home improvements to the house to enhance its value, to improve with energy efficiency for example. 

People may want to replace their windows, add cavity wall insulation, put a conservatory on the back of the house… anything that enhances your property can be done with additional borrowing. 

The first port of call for additional borrowing should always be the existing first chargeholder – your current lender. They may allow a further advance on the existing mortgage. Some lenders don’t offer these further borrowings because they’re a securitised lender and they’ve sold that loan onto an institution, or their in-house processes don’t allow it. 

In that case we would look at second charge lenders. These will lend a sum of money and put a ‘charge’ on the property that sits behind the main mortgage or the first charge. It could even be a third charge if you’ve already got a second charge. They all sit in line behind each other. 

Second charge basically means that if the house is sold, the money goes to the first charge holder first and then to the next in line thereafter. Typically a second charge is used where the first lender can’t or won’t lend the money, or when the client’s on a fixed rate or a variable rate mortgage and redemption penalties would apply if they remortgaged to a new lender. 

You borrow the second charge for a period to do the works that you want to do. As soon as the redemption period on the first charge ends, you can remortgage to another lender and hopefully get a better interest rate overall. 

Who is a second charge loan for?

Second charges are for people who have a first mortgage. You don’t look at a second charge for a First Time Buyer. They were around years ago, and called top-up loans, but not today. Although I suppose Help to Buy could have been regarded as a second charge loan. 

Typically, though, they are for an existing mortgage holder who wants to facilitate improvements to the property or consolidate existing unsecured debt. They might be paying high charges on credit cards or other unsecured loans, where it makes financial sense to move that unsecured borrowing to the mortgage, to get a lower interest rate and hopefully pay that money off. 

People who typically just pay the minimum payment on the credit card are paying thousands in interest over the years. In some circumstances, it may be beneficial to put that debt on a secured basis with a fixed term to pay it off at a lower interest rate.