Best Ways To Get Accepted For A Second Mortgage
Best Ways to Get Accepted for a Second Mortgage
To get accepted for a second mortgage in the UK, it’s good to know what criteria the lenders look at when assessing if you qualify for a loan.
In this blog, we look at the information the lenders require to decide if they are happy to lend to you.
Remember, with a second mortgage, you are offering your home to the lender as security, and in the event of you not keeping up repayments, you could lose your home.
Do I Qualify For A Second Mortgage?
To qualify or apply for a second mortgage, you must meet the following criteria:
Be over 18 years of age.
Be a homeowner and have a mortgage secured against the property you offer as security.
Although most people offer their principal residence as security for a second mortgage, several lenders will consider taking someone’s buy-to-let property as security. Interest rates are generally higher when a lender takes a buy-to-let property as security.
If the property offered as security is in joint names, then both parties are jointly responsible for any second charge.
You need to have equity in your home. Equity is the difference in the value of your home and the outstanding balance of any mortgages secured against the property. For example, if your property is worth £500,000, and you have a mortgage of £350,000 secured against the property, then you have equity of £150,000.
Lenders will only lend up to a certain percentage of your property's equity. This is referred to as the loan to value or LTV. If a lender was prepared to lend up to 90% LTV, then you multiply the value of the property by 90% (£500,000 x 90% = £450,000) to get £450,000, and then deduct the mortgage of £350,000, meaning that you could potentially borrow £100,000.
You need to be employed or self-employed.
If you’ve recently changed jobs and are now working for a new employer, most lenders will insist that you have completed your probation period. If you have moved from one company to another but are carrying out a similar job type, some lenders may be happy to offer you a loan even if you are approaching the end of your probation period.
More importantly, you need to feel sure that you will pass any probation period before you take out a second mortgage. It would be wise to carry out your own affordability checks.
If employed, you might be asked for your last three payslips. In some situations, you may be asked to provide recent bank statements to prove the salary amount on your wage slip is shown in your bank account.
If self-employed, you will be required to provide recent SA302s. Sometimes, a lender may request that your accountant complete a certificate detailing the company's profit and income.
Some lenders will also take into account pension income on the basis the pension is paid until the borrower dies.
Things To Know Before You Apply For A Secured Loan
When applying for a second mortgage, also referred to as a secured loan, homeowner loan, or second charge mortgage, there are some points that you need to be sure of:
The amount of money you want to borrow - it’s essential to work out exactly how much you want to borrow. It's advised that you don’t borrow more than you need as the cost of borrowing can be high, and you may repay a large amount of interest if you keep the loan for, say, ten years.
If you are carrying out a big home improvement project, it’s recommended that you shop around to get competitive quotes from builders and ensure they can start work when you want them to.
If you are quoted, say, £40,000 to complete all works, you could consider borrowing £43,000 to cover any unexpected costs. If the works cost £40,000 or less, you can make a capital repayment and repay any unused money back into your account. Explain to your mortgage broker that you would like to consider a lender allowing you to repay capital.
What do you need the money for - people borrow for many reasons, including debt consolidation, home improvements, purchase of a second home or a buy-to-let property, a wedding, or a holiday.
While everyone enjoys a holiday, you must determine the cost when considering the interest you will pay back.
The value of your property - it’s essential to get a realistic idea of the value of your property as it can affect the amount you can borrow and the interest rate.
Suppose you live in a street where all the properties are similar. In that case, it’s probably fair to say that if your next-door neighbour has recently sold their property for £375,000, your property is worth a similar amount subject to it being the same size and in similar condition.
You could also ask two or three local estate agents to visit to understand the value.
The amount you owe on your current mortgage - this is to assess the equity and the amount you can borrow. Often, the amount due on your mortgage appears on a credit search.
The credit search will determine the amount you borrow and at what interest rate. The lower your credit rating, the less you can borrow, and you will pay a higher interest rate. You might have a low credit score because of missed credit card payments, which will result in higher rates being paid.
The higher your credit score, the more you can borrow at a lower interest rate.
How much can you afford each month - it's crucial that you can comfortably afford the proposed monthly repayments.
With the second mortgage being secured against your home, you need to feel confident that you can make repayments, allowing for a change in your circumstances. Remember, you will be expected to pay the monthly repayments every month. If you feel there is a danger that you might not be able to make a repayment, it is strongly recommended that you contact your mortgage lender as soon as possible to come to an arrangement.
What Are The Risks Of A Second Mortgage?
With a second mortgage, like a first mortgage, you can lose your home if you do not keep up repayments.
The main difference between a personal loan and a secured loan or second mortgage is that you are not offering your home as security, meaning that with a personal loan, you won't lose your home if you cannot make repayments.
Personal loans are typically from £3,000 - £15,000 (sometimes more) and are usually repaid over three to five years.
Although you are offering your home as security with a second mortgage, you can borrow significantly more money. The average loan size for a secured loan is currently circa £46,000. The loan term is up to 30 years, meaning monthly payments can be more manageable.
Will I Have To Repay An Early Repayment Charge?
With second charges, the terms and conditions often mean an early repayment charge might become payable. Early repayment charges typically apply on fixed-rate products and become payable if you pay off the loan in the fixed-rate period.
Your mortgage broker will compare secured loans and provide a mortgage illustration that will highlight the financial details, including:
The loan amount you want to borrow
All fees payable include the broker, valuation, legal, and other fees.
Any early redemption charges that apply
The interest rate
The term of the loan
Who you need to complain to if you have a complaint
Mortgage Brokers Find The Best Product For You
When looking to raise finance, it is a good idea to approach a professional mortgage broker who is CeMAP qualified (Certificate in Mortgage Advice and Practice) and regulated and authorised by the Financial Conduct Authority (FCA).
A broker should not just look at one option. Generally, they will look at the following options:
An unsecured personal loan. These types of loans are generally for smaller loans, typically £3,000 - £15,000 and more in some cases. The loan is not secured against your property, so you won't lose your home if you can't repay it.
A further advance with your existing mortgage company. This is often a quick way of raising additional funds. Your mortgage broker must know your interest rate and any early repayment charges that might apply to your current mortgage.
A remortgage - if your current mortgage is on a higher-than-average interest rate and you don't have any early repayment charges, then a remortgage may be the best option.
A second mortgage - if early repayment charges apply on your original mortgage, the best advice might be to keep your current mortgage and raise the required funds with a second mortgage.
Options 2, 3, and 4 involve offering your home as security to the lender, meaning that you may lose your home if you miss repayments.
For more information about second charge mortgages and whether you can apply or be accepted, contact our expert team today.