First Charge Vs Second Charge Mortgages
First and second charge mortgages, used in the right circumstances and in the correct manner, both have their merits. First charge mortgages are the most widely utilised form of secured finance across the UK. Securing a typically large loan, using a property, usually your home as collateral, first charge mortgages allow borrowers to fund a wide range of purchases and investments ranging from properties to business investments.
Second charge mortgages though are increasing in popularity, with more people than ever taking out these mortgages. A second charge mortgage, as with first charge mortgages can be used for various purposes. These range from being used as a loan for home improvements to paying for a child’s education to weddings and more besides.
The crucial element to consider with a second mortgage is that you will be paying two mortgages at the same time and that the costs, (as it is not a first charge) will be different to a typical mortgage.
What Are First Charge Mortgages Used For?
Although first charge mortgages in the UK are most commonly used to purchase the property upon which the mortgage is secured, lenders will consider different circumstances depending on the amount to be borrowed and the specific circumstances of the borrower. For example, you may need to invest a significant amount of money into a business and should the risk not be too high, some lenders will consider lending on the basis of a first charge mortgage.
Alternatively, you may have purchased a new property using a bridging loan and should this be the case, it will cost you more than a first charge mortgage. Thus, many homeowners in such circumstances will need to exit their bridging loan to make their new property more affordable for the long term and so will need to remortgage onto a mainstream first charge mortgage.
What Are The Differences Between First and Second Charge Mortgages?
With a first charge residential mortgage, people will be borrowing money to purchase their home. A second charge mortgage in comparison is an additional mortgage taken out on the same property. With both types of loans, the property will act as collateral if the borrower fails to keep up with repayments.
Second charge mortgages work almost exactly the same as first charge mortgages, however, a second charge mortgage uses the positive equity borrowers have in their property as security. You will need both the first and second charge lenders to agree to the second mortgage as it will be the first charge provider who will get precedence should you be unable to make repayments. Thus, the second mortgage will have slightly higher interest and APR (more information about APR) attached, but may still be a better option than remortgaging, particularly if there are early repayment charges to consider.
It will therefore be vital to make sure you are financially comfortable enough to afford repayments on these secured loans before taking either of them out, as failure to keep up with repayments can mean the loss of your home.
Mortgage Affordability Checks
When applying for either of these types of mortgages, the borrower will have to undergo stringent assessments to check whether they will be able to manage repayments on the loan. With a second charge mortgage, the lender will evaluate whether the borrower will be able to keep up with both the first and the second charge loan repayments before approving an application.
Whilst first charge mortgages are typically used to help people purchase their home, second charge mortgages are spent on a variety of different things, commonly used as an alternative to personal loans when borrowers are unable to access unsecured finance options.
For example, those who are self-employed may find it difficult to meet the eligibility criteria for personal loans, and instead use a second charge mortgage to access the finance they need through a loan more accommodating to this job type.
What Are the Benefits of Having a Second Mortgage?
There are many different reasons why people borrow on the basis of a second charge mortgage. These types of mortgages can be taken out over a long term, making their repayment plans more manageable. Additionally, borrowers may also be able to pay it back early, avoiding too much interest from building up and early repayment fees accruing. This will depend on the conditions of the loan, and is not applicable to all types of second charge mortgages.
Some of the main reasons why borrowers may take out a second charge mortgage include:
- To avoid unattractive remortgaging rates
- For those who struggle to take out unsecured loans
- To avoid early repayment charges (ERCs)
If your credit rating goes down since the time you took out your first charge mortgage, it may prove more be difficult to access the best remortgage deals, and you may end up paying more interest on your mortgage. To avoid unattractive remortgaging rates, it may be worth considering a second charge mortgage, as you then might only have to pay more interest on the additional amount from this loan, as opposed to the whole mortgage itself.
Also, for those with a high early repayment charge on their first mortgage, rather than remortgaging, it might be cheaper to simply take out a second charge mortgage. With this, borrowers can then avoid early repayment charges.
First or Second Charge Mortgage: Which Should I Choose?
The type of mortgage you should choose will depend upon your situation. First-charge mortgages are the go-to for those who need financial support when purchasing their home. If you already have a first charge mortgage, and are in need of extra finance or want to avoid ERCs and unattractive remortgaging rates, it might be worth considering a second charge mortgage.
Before taking out any type of loan, it will be important to understand all of the requirements to this type of finance, and whether it’s the best option for you