Second Mortgages Vs Equity Release | The Second Mortgage Company

Second Mortgages Vs Equity Release


If you are trying to borrow a lump sum of money using the equity in your home, there are various options available, each with their own advantages and disadvantages. Two of the most common ways in which to utilise the equity in a property are second mortgages and equity release.

What Is The Difference Between a Second Mortgage and Equity Release?

Both equity release and second charge mortgages are a means of borrowing a lump sum of money using the equity in your home. There might be many reasons for doing this, for example funding a large-scale home renovation, tuition fees, a wedding or a vacation.

Some people also choose this option as a way of consolidating their debt. 

Equity release in the UK typically relates to borrowers over the age of 55 that need to raise funds and unlock equity from their property. Second mortgages on the otherhand are a second charge loan, secured against equity in a property, and running alongside a first charge and 'traditional' mortgage.

What Is a Second Charge Mortgage?

A second charge mortgage is an additional mortgage taken out on the same property as your first mortgage. These types of mortgage allow you to withdraw funds using your home as collateral. As the name suggests, a second mortgage can only be in place in cases where the property or homeowner also has a first charge mortgage on the property.

The second charge mortgage lender and the first charge mortgage lender as well as the property owner will need to agree on the terms and conditions of the second mortgage. If the property owner fails to make their repayments on the their mortgages, the first charge lender will get precedence in seizing the property to recoup their losses. 

Therefore, the risk to both the second charge lender and the property owner are greater when it comes to a second charge mortgage, as the property owner will have two mortgages requiring regular repayments and the second charge lender stands to potentially lose out if the property owner defaults on both their mortgages. Thus, second mortgage contracts are more expensive than regular first charge mortgages.

What Is Equity Release?

Equity release in the UK is the process by which a homeowner or property owner who already owns a portion of equity in their property is able to unlock and access the equity they own in their property, in the form of cash. The money taken out through equity release can either be released in the form of a single, larger lump sum or in a number of instalments, or a mixture of the two.

What Makes Second Charge Mortgages and Equity Release Different?

For second mortgages, you will receive the loan in one lump sum. If you need more money beyond that initial payment, you will need to reapply for another loan or seek finance elsewhere.

Equity release, on the other hand, can be used for whatever the property owner needs and unlike a seond mortgage, will not need to be repaid. However, when the property owner dies, their equity release plan will come to an end and property will likely need to be vacated, with the company having provided the equity release plan either taking ownership of the property or, requiring the equity release debt to be repaid.

Advantages and Disadvantages of Second Mortgages and Equity Release

If you opt for equity release, you can benefit from a fixed interest rate meaning that your interest rate will not increase over the lifespan of the loan.

Not only that, but using a property as collateral is often preferred by lenders as it is one of the safest and best forms of security, usually resulting in better loan rates and lower costs over time compared to other forms of collateral for other loans. Unlike some secured loans, you can use your home equity in any way you see fit when utilising equity release plans.

One of the biggest drawbacks of equity release as well as second charge mortgages, is that your home is ultimately used as collateral. This means that if you default on the payments, your home could be repossessed by the lender. 

You will also have two mortgage payments to meet when you take out a second mortgage against your home and this can in some circumstances create undue financial strains as you will have two obligatory payments to meet per month and your disposable income will be reduced.

Additionally, you need to consider closing costs. These can be anything from 2% to 5% of the total loan amount.

What to Consider Before Choosing Second Mortgages or Equity Release

In order to take out a second charge mortgage or arrange an equity release plan, you will need to own a significant portion of equity in your home. This means that you will need to have put down a high down payment initially or have already paid off a large portion of the propperty's value through your mortgage payments.

Additionally, releasing equity from your home or taking out a second mortgage will typically only be possible if you already have a good credit score and a low amount of existing debt. Often, lenders will have stricter lending criteria for equity release meaning that it may not be possible for many.

As a mortgage is secured against your home, your home could be repossessed if you do not keep up the mortgage repayments. Think carefully before securing other debts against your home.

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