‘The second mortgage allows us to stay in control’: Soaring house prices are driving take-up of ‘second charge’ mortgages, so can TWO home loans work out better than one?
Tougher lending rules are forcing more homeowners to turn to ‘second charge’ loans to fund home improvements, such as extensions, and consolidate debt.
Industry figures show a 25 per cent rise in the sums borrowed this way in the three months to the end of May against the same period last year.
The rise in second charge borrowing – so called because the lender is second in line for repayment behind the mortgage provider if a borrower’s home is repossessed – has been fuelled by rising house prices and the squeeze on household budgets. But experts are warning homeowners to look at alternatives first.
Loan: Irene Watson and Mark Fairbrother are turning a barn into flats
THE SECOND MORTGAGE ALLOWS US TO STAY IN CONTROL
Property developer Irene Watson and her partner Mark Fairbrother took out a second charge mortgage on their home to invest in their business.
Irene, 50, and Mark, 53, from St Madoes, near Perth, are converting a barn into three flats. They will sell one and let the other two.
The couple, who have two daughters, looked at other loans but found the terms and fees onerous.
‘The second charge mortgage allows us to remain in control,’ says Irene. ‘We didn’t want to touch our first mortgage as we have a good interest rate. We intend to repay the second charge quickly so it is easier to keep it separate.’ They have borrowed £100,000 through Shawbrook Bank at 7.4 per cent a year fixed for five years.
There was a £499 set-up fee but no penalty if the loan is repaid early.
THE ATTRACTION OF A SECOND CHARGE LOAN
Mortgage rules have become stricter in the past couple of years, with lenders applying tough ‘stress’ tests to make sure borrowers can meet repayments if interest rates rise. So you may not be able to secure extra funds from your original lender.
Some lenders consider certain borrowers too old or too risky to increase their loans.
But some borrowers also prefer to leave an existing mortgage in place because they would lose an attractive interest rate if they remortgaged, or there might be a steep exit penalty for switching.
By taking out a second charge loan with a new provider, your first mortgage is unaffected, but you need to tell the original lender. You must have enough equity in your home to cover it.
A second charge loan may suit borrowers who have had payment problems, for example due to job loss or illness. These homeowners are often refused an increase on their first mortgage, but a specialist lender may take a different view.
Maeve Ward, managing director of residential mortgages at Shawbrook Bank, a specialist in this type of lending, says these issues are not always signals of poor financial management.
She says: ‘We take the time to understand the borrower’s situation before making lending decisions.’
More can be borrowed with a loan secured on a home than with an unsecured loan. Personal loans from high street banks are usually limited to £25,000.
WEIGH UP THE COST
Greater competition means interest rates have come down on second charge loans, but you should still expect to pay a higher rate than on your main or first mortgage.
Contact a specialist broker, such as Fluent Money or Freedom Finance, which can compare all the deals on the market.
Borrowers with a good credit history can get fixed or variable rates starting at about 4 per cent a year for the first three years. The minimum loan size is usually £10,000.
Some second charge lenders allow penalty-free overpayments, including full repayment without charge.
Those who have had payment problems in the past or are borrowing smaller sums pay more interest – up to 15 per cent. For them it may be better to investigate other options (see above).
The market is growing, but competition is still limited, says David Blake of Which? Mortgage Advisers. He says: ‘Borrowers should consider the impact of future interest rate rises on their ability to repay a new and existing mortgage before taking up this option.’
Borrowers turn to second charge mortgages not just for home improvements but also if they want to put all their loans – such as credit cards, overdrafts and car loans – into one pot.
It is important to weigh up the implications of this. While rates are often lower than on a overdraft or credit card, the term on a second charge loan, which can be up to 25 years, means the borrower will pay back far more interest over time.
Converting unsecured debt into borrowing secured on property also puts a home at risk.