If you own a home with a mortgage on it and you need to raise money, you do not always have to remortgage. A second charge mortgage, also known as a secured loan or a homeowner loan, lets you borrow against the equity in your property while leaving your existing mortgage exactly as it is. It is a useful tool in the right situation, and an expensive mistake in the wrong one. Here is the plain English version.
What a second charge mortgage actually is
A second charge mortgage is a separate loan, from a separate lender, secured against a home that already has a mortgage on it. Your original mortgage is the first charge. The new loan sits behind it as the second charge, with its own interest rate and its own monthly payment. The three names you will see, second charge mortgage, secured loan and homeowner loan, all describe the same product.
The word charge simply means a legal claim against your property. If the home is ever sold, the first charge lender is paid back first, and the second charge lender is paid from whatever is left. That running order is the single most important thing to understand, because it explains almost everything else about how these loans work.
How does a second charge work?
You keep your current mortgage untouched and take out a second, smaller loan alongside it. You then have two payments each month, one to your original lender and one to the second charge lender. The new lender registers a second charge against your home, and in most cases your first lender has to give consent for that to happen.
Because the second charge lender is second in the queue to get their money back, they are taking more risk than your main lender. That is why the interest rate is higher than a typical main mortgage, and it is the trade off at the heart of the product.
Why use a second charge instead of remortgaging?
On the face of it, remortgaging to borrow more looks simpler. But there are good reasons people choose a second charge instead:
- You want to protect a cheap rate. If your main mortgage is on a low fixed rate, remortgaging the whole balance could mean losing it. A second charge lets you raise extra money without disturbing the good deal you already have.
- Your current deal has a big exit penalty. If leaving early triggers a large early repayment charge, a second charge can be cheaper overall than paying that penalty to remortgage.
- Your circumstances have changed. If your income has dropped, you have recently become self employed, or you have had a credit blip, a high street remortgage may say no. Second charge lenders are often more flexible.
- Your lender will not lend you more. If a further advance from your existing lender is declined, capped, or too slow, a second charge from another lender can fill the gap.
How much can you borrow on a second charge?
It comes down to two things: how much equity you have in your home, and whether you can afford the repayments. Lenders look at your combined loan to value, which is your first mortgage plus the new second charge added together as a percentage of your property value. Many will lend up to around 85 percent combined, and some specialists go higher, but the more equity you keep, the better the rates you will see.
Loan sizes range widely, from a few thousand pounds up to very large sums, again depending on equity and affordability. As with any mortgage, the lender will assess your income and outgoings to check the payments are sustainable.
What does a second charge cost?
Expect the interest rate to be higher than your main mortgage, because of that second place in the queue. On top of the rate there are usually some fees: a lender or arrangement fee, a valuation (often an automated one rather than a physical visit), and a broker or packager fee. Legal work tends to be lighter than a full remortgage. Every regulated quote shows an APRC, a single figure that helps you compare the true cost of the whole deal rather than just the headline rate.
The risks you have to weigh
- Your home is on the line. Miss the payments on either loan and the property can be repossessed. The second charge lender can force a sale even though they are second in line.
- It costs more than a main mortgage. The higher rate and the fees mean it is rarely the cheapest way to borrow if a remortgage or further advance is genuinely available to you.
- Turning unsecured debt into secured debt. Using a secured loan to clear credit cards or personal loans moves that debt onto your home. Spreading it over a long term can also cost far more in total interest. We cover this properly in our guide to consolidating debt onto your mortgage.
Second charge, secured loan, homeowner loan: are they different?
No. They are three names for the same thing: a loan secured against a property that already has a mortgage on it. Different lenders and websites use different labels, but the product, the regulation and the risks are identical. If you have seen all three terms and felt confused, that is the only reason why.
Is a second charge right for you?
It can be the smart choice when you want to keep a good first mortgage, avoid a hefty early repayment charge, or borrow when a remortgage is not available. It is the wrong choice if a cheaper route is open to you, or if you would be securing short term debt against your home without a clear plan. The honest answer almost always depends on your own numbers.
A good broker will compare a second charge against a remortgage and a further advance and tell you which is genuinely cheapest for you. If you want that worked out properly, Debbie at DS Financial can talk it through. For related reading, see our full remortgage guide and equity release vs remortgage.
General information, not financial advice. A second charge mortgage or secured loan is secured against your home, which may be repossessed if you do not keep up the repayments.
Sources: MoneyHelper, Second charge mortgages, FCA, Mortgages.