Second Mortgage Interest Rates Explained

27/11/2020

If you are a property owner and are able to apply for a second mortgage, you will likely, as in the case of first charge mortgages be acutely aware of interest rates for mortgages in the UK; how they work and how they affect your second mortgage. Ultimately, interest rates can be the difference between affordability when it comes to a mortgage of any nature and potentially struggling to meet your repayments.

With more people than ever before turning to second mortgages in the UK, more people than ever are therefore being affected by or benefiting from interest rates. With the UK Base Rate (of interest) being set by the Bank of England, there is an accepted degree of fluctuation. Thus, when it comes to mortgages which are not at a fixed rate, the mortgage holder will need to take the Base Rate into account throughout the course of their mortgage as well as when remortgaging.

How Do Interest Rates Affect Second Mortgages?

Generally speaking, interest rates on second mortgages are higher, which means you will almost certainly have to pay an increased amount of interest on your second mortgage compared to your first charge mortgage. If you default on your payments and your home is repossessed the second mortgage lender could lose out if the proceeds of the sale fail to clear both loans.

An increase in interest rates is good news if you have money saved and potentially if you have money deposited in an ISA. However, if you are looking to borrow money or already have a mortgage, increased interest rates are more likely to be a bad thing financially. When interest rates increase it will in practice mean you will repay more on your mortgage or that if you are looking to borrow money you will need to borrow with a higher interest rate on your repayments.

A second mortgage will generally already be charged at a higher interest rate, because of the risk to the lender and because it is not a regulated mortgage contract in the same way a first charge mortgage or self-build mortgage may be. If interest rates are high you will pay more interest on the loan in question. However, if interest rates fall, it may be a good time to consider taking out a second mortgage if you need to borrow more money or consolidating debts and mortgages if possible into a single, more affordable offering.

How Does a Second Mortgage in The UK Work?

Sometimes referred to as a ‘second home mortgage,’ a second mortgage is a standalone secured loan which runs alongside your first charge mortgage, but is treated as a totally separate entity. However, with the first charge lender getting precedence over what to do should the borrower default, there is an increased degree of risk to the lender. There is also the increased risk to the borrower, with a second mortgage obligation to consider. Hence, when it comes to interest rates on second mortgages, they are expectedly higher. 

Remember that if you become unable to repay your first or second mortgage your home could be repossessed.

A second home mortgage is in practice simply a secured loan which uses the paid off capital (or equity’) in your home as collateral. That means that your second mortgage will be based on the difference between the value of your property and the amount you still owe on your first mortgage.

Why Would I Need To Take Out A Second Charge Mortgage?

Second charge mortgages can be an attractive alternative to remortgaging your home because remortgaging often comes with large financial penalties known as early repayment charges (ERCs).

Whereas, when you get a second charge mortgage on your property, there is no need to remortgage. Your second mortgage will stand completely separately from your first and will continue running unimpeded, meaning you can borrow additional money against your property without incurring those penalty fees. However, your first and second charge lenders will need to agree to the second mortgage

Another reason that a second mortgage could be a good choice is if you are getting an attractive rate on your current mortgage. If you are getting a good rate on your mortgage but you need to borrow more, remortgaging would potentially mean losing that rate. With a second mortgage, that extra money borrowed will not affect your current mortgage at all.

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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