What Happens If You Can't Repay a Second Mortgage?
If you fall behind on your second mortgage repayments or you cannot pay them for one reason or another, the lender may or may not foreclose, depending on the home's value. The decision of the lender will be entirely dependent on whether or not they are likely to regain their losses.
Second mortgages in the UK work in tandem with your usual and inevitable first charge mortgage. However, should a borrower default or otherwise be unable to make their repayments, the first charge lender will take precedence. These terms have been agreed between the first and second charge lender at the start of the second mortgage. This is part of the reason for second charge mortgage being more expensive and with higher interest; there is a greater risk to the lender in question.
If you can’t repay your second mortgage, the property will not necessarily be repossession, but your credit rating is likely to take a substantial hit and there may well be other repercussions you should consider.
Second Mortgages Run Alongside Your First Mortgage
A second mortgage stands completely separately from your original mortgage. However, as the name suggests, you will have two mortgages at the same time and you will need to pay them both off at the same time. Remember, if you become unable to repay your first or second mortgage your home could be repossessed.
A second charge mortgage is a secured loan and uses the paid off capital 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 charge mortgage.
What Happens If I Fall Behind on Second Charge Mortgage Payments?
A second mortgage is ‘junior’ to a first mortgage, which means that your first mortgage always takes priority over your second. So, if you did foreclose, your priority mortgage would be paid before any other loans. The priority will be determined by the date the mortgage was taken out, hence the ‘first’ or ‘second’ mortgage.
Once the borrower becomes delinquent on a mortgage loan, a lender can choose to foreclose, no matter whether it is your first or second mortgage. If you default on your first mortgage, your lender is likely to begin foreclosure proceedings. However, if you default on your second mortgage this is not always as simple.
In some cases, even if you default on your payments, the lender of your second mortgage may choose not to foreclose depending on the current value of your home.
Because your first mortgages take priority, it means that any money from foreclosure will go to pay off that debt first regardless and thus foreclosing is not always in the best interests of the second charge lender. If the lender of your second mortgage determines that the property will not make enough money to cover both loans, there is no advantage to them foreclosing. It all depends on the amount of value and equity held in the property.
What If I Already Have Equity in the Property?
If you have equity in the home, it means the property is worth more than you currently owe. If your property has equity and you begin to fall behind on your payments, the second mortgage lender will likely initiate a foreclosure to recover part or all of the money loaned to you once the property is sold at a foreclosure sale.
If your home is ‘underwater,’ it means your home's value is lower than the amount you owe on your first mortgage.
A second mortgage on an underwater home is effectively unsecured. If you start falling behind on payments in this scenario, it is not in the interest of the second mortgage lender to foreclose. This is because in the case of foreclosure, the money made from selling would not be sufficient to pay anything to the second lender. However, the second-mortgage lender could still sue you personally for repayment of the loan.
What Should I Do If I Can’t Pay My Second Mortgage?
If you have multiple loans and you're beginning to fall behind or you're facing foreclosure, it's worth considering talking to a property repossession and property litigation lawyer, who will understand the foreclosure details. They will be able to help you understand and address what will happen in all the various scenarios relating to your property.
In situations where you fall behind on payments or cannot repay loans it is always wise to seek financial advice from a professional.