Second charge mortgages

What a second charge is

Your existing mortgage is a first charge on the property. A second charge is an additional loan from a different lender, secured on the same property and ranking behind the first. Both loans run at the same time, with separate monthly payments to separate lenders.

Ranking behind matters. If the property were ever sold to repay the debts, the first lender is paid in full before the second lender receives anything. That is why a second charge is priced above a first charge: the lender is taking the risk that sits at the back of the queue.

The important thing to hold onto is that this is borrowing secured on your home or your property. It is not a personal loan with a better rate. The security is real and so is the consequence of not paying.

Why people use one

There are two circumstances where a second charge genuinely earns its place, and both are about protecting the first charge rather than about the second charge being attractive in itself.

A first charge rate worth keeping. If your existing mortgage is on a rate you would not get again today, remortgaging the whole balance to release money means giving that rate up on every pound you owe, not just on the new money. A second charge leaves the first mortgage untouched.

An early repayment charge. If your current product still has a charge for repaying it early, a remortgage triggers that cost on the whole balance. Where the charge is significant and there is time left to run, borrowing behind the first charge can be the cheaper route even at a higher rate on the new money.

Other cases arise because the alternative is not available: a first lender that will not offer a further advance, an amount or a purpose it will not consider, or an income position that today's first-charge lender would assess less generously than a second-charge lender would.

The honest comparison

A second charge should always be measured against the alternatives, and a broker who does not do that is not advising you. There are four routes, and each is better than the others in some circumstances.

A full remortgage. One loan, one payment, one lender, and usually the lowest rate on the new money. It is the right answer when your existing product is ending anyway, when there is no early repayment charge, or when the rate you can get now is not much worse than the one you hold.

A further advance from your existing lender. Additional borrowing from the lender you already have, added as part of the same first charge. Usually cheaper than a second charge, and simpler. Whether it is available depends on that lender's appetite, on what you want the money for and on how it assesses your income now.

Unsecured borrowing. A personal loan carries a higher rate but is not secured on your home, and it is usually over a shorter term, so the total interest can be lower even though the monthly payment is higher. For smaller amounts this is very often the better answer, and we will say so.

A second charge. Right when the first charge is worth preserving, when an early repayment charge makes a remortgage expensive, or when the other routes are closed. Wrong when it is simply the easiest thing to arrange.

A second charge is not automatically the right answer, and we will tell you when it is not, including when the answer is that you should not borrow at this point at all.

The first lender's position

The first lender's consent is usually needed, and whether it is needed turns on a technical point: whether there is a restriction registered against the title requiring the first lender's agreement before another charge is registered. In practice nearly every mortgage lender has one, so you should plan on consent being required.

Consent is normally given as a matter of routine, but it takes time, some lenders charge a fee for it, and a few are slower or more reluctant than others. It is a step to build into the timetable rather than a hurdle to worry about.

Term length, monthly payment and total cost

Second charge lenders will often agree a long term, and a longer term reduces the monthly payment. That is a genuine benefit if affordability is tight. It is also where the real cost of this borrowing hides.

Interest accrues for as long as the balance is outstanding. Stretching a loan over a much longer period lowers what you pay each month and raises what you pay in total, and on secured borrowing the difference is not small. If your reason for the longer term is affordability, take it — but take it knowing what it costs, and look at whether you can overpay later.

The trade you are actually making

Consolidating unsecured debt usually lowers the monthly payment and usually raises the total cost — and the home is now on the line for a debt that previously was not secured on it. That second point is the one that gets left out of the conversation.

So when consolidation is the purpose, we set out both figures: what you pay each month before and after, and what you pay in total before and after. If the total is materially worse and the monthly saving is modest, we will say that consolidation is not in your interest.

What the lender assesses

Second charge underwriting looks broadly like first charge underwriting, with more attention to the position behind the first loan.

• Your income, evidenced, and your existing commitments including the first mortgage payment
• The equity available after the first charge, and the property's value on a lender's valuation or index-based assessment
• Your credit history, where second charge lenders are frequently more flexible than first charge lenders
• The purpose of the loan, which is asked about properly and affects appetite
• The property itself, including construction, tenure and any lease terms
• Whether the first mortgage is up to date, and whether there is any arrangement in place on it

Second charges on buy to let and commercial property

The structure works on investment property too, and for landlords the logic is often stronger: releasing money from one rental property for a deposit elsewhere without disturbing a first charge that is on good terms and passing a rental stress test you would not want to repeat today.

The assessment shifts to the rent, much as on a first charge buy to let, with the first mortgage payment taken into account. On commercial property the same idea applies against the trading income or the tenant's rent. Fewer lenders operate here than on residential second charges, and pricing reflects that.

Regulation, and the cancellation position

Second charge lending on a residential property — the home you live in — is regulated by the Financial Conduct Authority under the mortgage rules, with the protections that brings, including access to the Financial Ombudsman Service. Second charges on investment and commercial property generally are not regulated.

There is a widespread misunderstanding about cancellation that is worth correcting plainly. There is no 14 day statutory cancellation right on a second charge loan. That right belonged to the consumer credit regime, and it fell away when second charge lending moved into the mortgage rules in 2016.

What applies instead is the reflection period the lender must give you on a binding offer, during which you can consider it and are not obliged to proceed. Separately, and entirely distinctly, you have the right to cancel our own client agreement within 14 days under our Terms of Business. The first concerns the loan; the second concerns your appointment of us. They are not the same thing and should never be described as though they were.

Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.

How we handle a second charge case

Our fee is typically £495, disclosed in writing before you apply, and specialist enquiries reach Nik Mair, our managing director, on the working day they arrive.

• We start with what you need the money for, and whether borrowing is the right answer at all
• We compare a second charge against a remortgage, a further advance and unsecured borrowing, and show you the figures both ways
• We check your existing product for an early repayment charge and how long it has left
• We deal with the first lender's consent and build the time for it into the timetable
• We set out the total cost as well as the monthly payment, particularly where debt is being consolidated
• We tell you when a second charge is the wrong answer, and we would rather lose the case than place the wrong one

What we charge

Our fee is typically £495, though complexity moves it, and it is always disclosed in writing before you apply. Each stage of the fee is earned when that stage is reached and is not refundable after that point. Separately, you have the right to cancel within 14 days, as set out in our Terms of Business. We are usually also paid a procuration fee by the lender.