First Charge vs Second Charge Mortgages

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Toy house and calculator on the table

First and second charge mortgages are both methods of financing the purchase of a property. Generally speaking, first charge mortgages are the most common form of secured financing used in the UK, allowing millions of people country-wide to fund the purchase of their property, using the property itself as collateral. 

Second charge mortgages are generally less common but are growing in popularity and can be used for multiple purposes. Here we explore the key differences between the two.

What is a first charge mortgage?

A first charge mortgage is the first mortgage charged on a specific property. They are used to purchase property with the property being purchased acting as collateral to secure the mortgage. First charge mortgages are generally not suitable when needing to sell your property fast, as there are a number of checks and processes lenders must go through before providing the loan in question.

Typically these mortgages have fixed repayment plans within a certain time frame. Usually, first charge mortgages refer to any normal residential mortgage where you have borrowed money to purchase the property you intend to live in.

What is a second charge mortgage?

A second charge mortgage, or second mortgage, is an additional mortgage taken out on the same property as your first mortgage. It lets you borrow further funds by using your home as collateral. Second charge mortgages can be used to fund a range of different purposes such as home renovations.

How do second charge mortgages work?

Second charge mortgages work in more or less the same way as first charge mortgages in that you are borrowing money and putting up collateral as security for the lender; in this case, the positive equity in your home acts as the security. Much like getting a payday loan online, second charge mortgages can be applied for online, making them a potentially straightforward financial product to apply for.

Just like with regular mortgages, you will need to be eligible to take out the second charge mortgage and meet certain lending criteria stipulated by the lender. Because a second charge mortgage is an additional mortgage on top of your existing first charge mortgage, affordability checks may be even more strict as the lender will need to ensure that you will be able to meet both repayment obligations.

Like first charge mortgages, second charge mortgages can be fixed or variable and, generally speaking, will have higher interest rates than first mortgages.

With regard to repayment, first charge mortgages always take priority over the second mortgages.

How much can you borrow with a second charge mortgage?

Second charge mortgages allow the borrower to borrow up to the amount of positive equity that they have in their homes. For example, if your home is worth £300,000 and you have a first mortgage worth £200,000, you have £100,000 meaning that, theoretically, this would be the maximum amount that you could borrow.

What are the advantages and disadvantages of a second charge mortgage?

A second charge mortgage might be a good option if you are wanting access to a large amount of money. This can be done via remortgaging your house; however ,this usually incurs an extremely high early repayment charge. 

Second charge mortgages, however, can help you gain access to all of the equity in your home in order to use the money for something else such as a home renovation, school fees or consolidating credit card debt. It is worth comparing if remortgaging could be a cheaper option.

Another reason why a second charge mortgage could be beneficial is if, for whatever reason, you are unable to take out an unsecured loan. This could apply to those who are self-employed or if you have a poor credit score. If this is the case, you can also take action to improve your credit score and increase the likelihood of being approved for a loan.

However, taking out a second charge comes with a great deal of risk. It adds additional financial strain as you will not only need to meet the payment obligations of your first mortgage, but also your second mortgage. Thus, you will  need to make sure that you have the cash flow available to afford these multiple payments. If you fail to meet repayments of either mortgage, you could risk losing your home.

If you are thinking about taking out a second charge mortgage in order to consolidate existing debt, it could work out as more expensive in the long-run as you most likely will have a repayment plan spanning 25 years.