Is It Easy To Get a Second Mortgage?
A second mortgage is loan secured against your home that you can take out in addition to your first mortgage. Getting a second mortgage doesn't replace your first one.
It's a separate debt, meaning you'll have two loans secured against the same property. However, with a second mortgage, you are free to spend the money from the loan how you wish. The mortgage can last up to 30 years, depending on how much you borrow and your age.
Getting a second mortgage is often less complicated than other loan options. This is because the loan is secured against your home and therefore less risky for lenders.
As a result, lenders are more inclined to lend to you with a second mortgage than if you apply for unsecured credit. However, when getting a second mortgage, there are likely to be more thorough affordability checks than when you got your first mortgage.
They can be a beneficial form of credit and a lifeline in a financial crisis; however, the decision should not be made lightly. Interest rates can be a lot higher than for first mortgages and you should carefully consider the exact mortgage terms, fees, and any early repayment charges.
How Do You Qualify For a Second Mortgage?
To qualify for a second mortgage, there are specific criteria you must meet, although different lenders will spell out their specific criteria, with some requiring different documentation and checks. Some lenders will be more lenient whilst others may be stricter. Some common checks and considerations however are almost universal.
Be a Homeowner
You must own the property you are offering as security and the property must be considered to be mortgagable, meaning that it can be lived in and that there is a minimum of a working kitchen and bathroom.
Most properties are made with bricks and mortar which lenders are generally happy to lend on. However, there are various types of construction such as concrete or steel framed where lenders are not prepared to lend, or if they do it’s at a reduced loan-to-value.
The property needs to be occupied which would normally be the property owner, however a number of lenders will consider applications where the security is let out to a tenant. If it were let out the owner would normally have a 6 monthly assured shorthold tenancy agreement in place with the tenant. This agreement states the monthly rental that is received which forms the basis of the affordability calculation.
If you own a leasehold property then there normally needs to be a long lease remaining at the end of the loan. For example some lenders might want to see a minimum term of 50 years outstanding at the end of the loan term. Therefore someone looking to borrow over 20 years would need to have at least 70 years remaining on their lease when they take out the loan.
Pass an Affordability Check
All lenders conduct an affordability check before granting second mortgages.
They will assess your credit history, current income, regular monthly outgoings and your current mortgage payments, to determine whether you will be able to afford the repayments. In addition lenders will carry out a financial “stress test” which will be a calculation to see if you could still afford the loan if rates were to increase by say 3%.
It’s most important that you are able to maintain the repayments throughout the whole term of the loan as your property is acting as security and in the event of non payment you may lose your home.
To assess an employed persons income accurately, lenders would want sight of your last three wage slips to show your basic pay plus any potential overtime or bonuses. If the overtime is regular lenders will often take into account a percentage of the overtime income when determining the income.
For self employed applicants lenders would want to see their SA302’s or a certificate from the accountant confirming their income for the last 2 or 3 years.
Have Equity in Your Home
Your mortgage is secured by the equity you have in your house, not its total value. Equity is the part of your home which you own outright and does not include what's left of your first mortgage. The more equity you have in your house, the more you'll be able to borrow.
Most lenders will lend up to at least 75% of the value of your property. If your property is worth £400,000 you multiply this by 75% = £300,000 and deduct your mortgage, say £260,000 which leaves £40,000 as a potential maximum loan size.
Some lenders will lend up to 100% loan-to-value (LTV) but the interest rates are considerably higher than someone looking to borrow up to 60%. Generally the higher the LTV, the higher the interest rate,
How To Get a Second Mortgage
Applying for a second mortgage is similar to the process for a first mortgage. The application process is straightforward, but lenders will need to check your credit rating and financial circumstances before approving the loan.
In order to ensure that you are getting the best possible deal it would be advised to speak to a qualified mortgage broker who has access to hundreds of lenders offering thousands of products. There is sophisticated software available to mortgage specialists who can source the best products within minutes.
Part of the process would be for your mortgage broker to consider other options including getting a further advance from your existing lender or remortgaging to a new lender. The setting up costs and interest rates with these options could be more competitive than those for a second mortgage.