A second charge mortgage gives an investor flexibility to release funds from a property without changing the primary mortgage which could be subject to Exit Costs that can range from 1%-5%.
Second mortgages have become increasingly popular for investors looking to raise capital for further improvements, pay off existing debt or make further acquisitions
As interest rates are currently on the rise, remortgaging to raise further funds is a less appealing option. In this article we run the steps on how much you can borrow and how much does a second charge mortgage cost?
The Following Topics Are Covered Below:
What Is A Second Charge Mortgage?
A second charge mortgage is a method for releasing funds from a property, If there is currently a first charge mortgage that is outstanding and there is enough equity within the property, instead of refinancing you can take out a second charge mortgage which means you there will be further repayments alongside your principle first mortgage loan.
A second charge is different from a first charge as it sits against a property that is already owned i.e 'sitting behind', and second in priority to paying off your first mortgage. For instance, if you fail to keep up with repayments on a property and the property becomes repossessed, the second charge lender will only be paid after the first mortgage is satisfied completely.
A second charge mortgage is based more upon amount of equity you own within your own home, rather than income or your credit score.
Benefits Of A Second Charge Mortgage?
Remortgaging during a fixed rate period means paying early repayment charges of up to 5% of the mortgage balance
A second charge can be an option for those who need to borrow more than 4.5 x their income or have affordability challenges
Generally, the application criteria for second-charge mortgage lenders is more lenient if you have an adverse credit score
If you have an interest-only mortgage or a low rate or repayment, this could increase by remortgaging whereas a second charge could protect it
How Much Can I Borrow With A Second Mortgage?
This is largely dependent on the amount of equity you own outright within the property and whether the payments can be supported alongside the first charge mortgage and other outgoings.
If you are aware of the market value and outstanding mortgage currently on your first charge mortgage, the below example will give a rough idea of how much you may be able to borrow.
Let's break it down
For example, if your buy-to-let property is valued at £500,000 and the amount owed from the first charge is £200,000. This means you own £300,000 equity in the property (or 40%).
In this scenario, it is possible to apply for a second charge loan of up to 80% Loan to Value for a BTL Property which means you can have a capital raise of up to £200,000 depending on the strength of your application.
Accelerated Finance works with over 50 finance partners within the commercial finance space and will be able to direct you to the appropriate lender. You will need your current lender's permission if you wish to take out a second-charge loan on your property.
How Much Does A Second Charge Mortgage Cost?
Second-charge mortgage rates are typically more expensive than first-charge lenders due to naturally the increased risk. You can typically expect to pay over 7% in current market conditions depending on the loan size.
The specific criteria to determine the interest rate can depend on a number of factors including the length of the term, your credit history, the security address in question and how much risk the lender perceives overall with your application.
How Do I Get A Second Charge Mortgage?
Second charges are more specialist loans and therefore it is advised to go through a broker such as Accelerated FInance to help with your application. Accelerated FInance's service is free, we receive a fee from the lender once the finance is complete.
To get started you will need the following to hand:
3 months bank statements or latest accounts if you're self-employed
Proof of Identity
Your latest mortgage statement
Agreed confirmation that your current lender is happy to proceed with another lender to sit behind their first charge in writing
This article is intended to provide a general understanding of the topic. The contents should not be treated as advice.
Accelerated Finance Limited only considers applications for commercial or investment properties. Accelerated Finance Limited is not regulated by the financial conduct authority and only provides unregulated loans via our network of lenders. Your property is at risk if you fail to make payments on a Mortgage Contract.
Please note that Accelerated Finance Limited and its employees do not give financial advice or recommendations on any product.