Can I Use a Second Mortgage To Pay Off Debts?
Second mortgages offer a great deal of flexibility in terms of what you are able to use them for. Their flexibility and their relatively low interest rates make them a good option for those looking to pay off debts.
There are numerous reasons why people apply for second mortgages in the UK, including paying for home improvements, purchasing a second property and paying for weddings and to help loved ones get on the property ladder.
Using a second mortgage to pay off debts, as a form of debt consolidation is one of the most common reasons for taking out a second mortgage. By consolidating debts into a single, more manageable debt, borrowers can often get on top of their finances and reduce their overall burden of debt.
Moreover, by consolidating and then repaying one’s debts, a borrower can improve their credit rating, which can then help them when it comes to borrowing money in the future.
How Do Second Mortgages Work?
Second mortgages are loans which are taken out against a property which already has an existing home loan on it. Just like with a first mortgage, you are putting up your property as collateral and confirming that in the case of defaulting payment, your lender has the right to take control of your property.
In the case of a second mortgage, your collateral will be the portion of your home that you have already paid off on your first mortgage. For example, if you own 50% equity in your property, with the remaining 50% in the form of a first charge mortgage, the second charge mortgage will be secured against a portion of the 50% equity which the property owner owns.
However, the first charge mortgage lender will take precedence should the borrower fail to make their repayments. Thus, there is an increased degree of risk on the part of the second charge lender, which is typically reflected in the price and costs associated with any second charge mortgage for debt consolidation or otherwise.
Some secured loans specify what you need to use the money you borrow for. However, second mortgages are favoured by many because you can use the money for almost anything. In addition, they usually have far lower interest rates than credit cards, although their rates and interest will be higher than for first charge mortgages.
How Much Can You Borrow With a Second Mortgage For Debt Consolidation?
A second mortgage for debt consolidation will work much in the same way as a second mortgage for any purpose. Your second charge mortgage and its value will depend on how much home equity you own.
This is the amount of your principal loan balance you have paid off over time. The more of your existing mortgage that you have paid off, the more equity you will have in your home and the more you will be entitled to take out for your second mortgage. However, second mortgage lenders will not allow you to borrow against 100% of the equity you own in your property.
Qualifying For a Second Mortgage to Pay Off Debts
Second mortgages allow you to use your home equity as a valuable asset, freeing up money that is tied up in your home to increase your present cash flow and invest it, whether in home improvements, debt consolidation or something else.
There are a range of reasons why people choose to take out a second mortgage, be it to pay for a large-scale expense such as a home renovation or vacation, or even to pay off cumulative debts and consolidate the repayments of all debts into a more affordable, single repayment amount.
In order to get a second mortgage, you will need to own a substantial portion of equity in your property. The exact amount of how much you can get from your lender will also depend on the value of your home and any other outstanding debts you may have.
For most lenders, in order to qualify for a second mortgage you will need a minimum credit score (usually at least 620). This assures lenders that you are a reliable borrower and can afford to pay back a second mortgage in addition to your existing financial obligations. Also, the higher your credit score, the better your rates will be.
Why Use a Second Mortgage To Pay Off Debts?
A key reason for using a second mortgage for debt consolidation is the increased control it gives you over your debts and finances. By utilising existing equity in a property to unlock the funds needed to pay off multiple debts, many borrowers find that they are able to get back on top of their finances and debts.
There are a few key reasons why you might want to use a second mortgage to pay off your debts, including:
- Flexibility - Unlike other loan types, second mortgages can be used for pretty much anything, meaning that you have total flexibility over what you want to use the money for, whether it is paying for a wedding or paying off debt.
- Lower Interest Rates - Second mortgages typically have lower interest rates than credit cards. Because they are a type of a secure debt (using your property as collateral) they are seen as less risky for lenders than other types of credit or loans.
- Higher Loan Amounts - With second mortgages, you can usually borrow more money than with other types of loans, especially if you have already paid off a large amount of your first mortgage. In some cases, lenders allow you to take up to 90% of your home equity in a second mortgage.
- Equity Utilisation - Owning a property, or a portion of equity in a property can allow the property owner to leverage their high value asset, using the money for whichever purpose it is needed most; for example consolidating debts.