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What is a Second Charge Loan?
A second charge loan, sometimes called a second mortgage or secured loan, is an additional loan taken out against your property alongside your existing mortgage. It uses the equity in your home as security. Because your first mortgage lender has the primary claim on the property, the second charge lender takes a "second charge", meaning they would be repaid after the first mortgage lender if the property were sold.
How Second Charge Rates Work
Interest rates on second charge loans are typically higher than those on first mortgages. This is because the second charge lender carries more risk: if the property is repossessed, they are only repaid after the first mortgage has been settled. Rates depend on factors including your credit history, the amount of equity in your property, the combined loan-to-value ratio, and the loan term. Borrowers with strong credit and significant equity will generally secure more favourable rates.
Understanding Combined LTV
Combined loan-to-value (LTV) is the total of your existing mortgage balance plus the second charge loan amount, expressed as a percentage of your property's value. For example, if your property is worth £300,000, your mortgage balance is £200,000, and you want to borrow £30,000, your combined LTV would be 76.7%. Most second charge lenders require a combined LTV of 85% or less, though some specialist lenders may consider higher ratios in certain circumstances.
Second Charge vs Remortgage
A remortgage replaces your existing mortgage with a new one, potentially releasing equity in the process. A second charge loan sits alongside your existing mortgage without affecting it. A second charge may be more suitable if you are on a favourable fixed rate that you do not want to lose, if early repayment charges on your current mortgage would be costly, or if your circumstances have changed in a way that might make remortgaging difficult. Conversely, a remortgage may be preferable if you can secure a competitive rate across a single, larger loan. Speaking to a qualified adviser can help you determine which option is right for your situation.
Frequently Asked Questions
What is a second charge loan?
A second charge loan is a type of secured loan taken out against your property in addition to your existing mortgage. It uses the equity in your home as security and sits behind your first mortgage. If the property were sold, the first mortgage lender would be repaid before the second charge lender.
How are second charge rates set?
Second charge loan rates are influenced by several factors, including your credit score, the amount of equity in your property, the combined loan-to-value ratio, the loan amount, and the term. Because the lender takes on more risk than a first mortgage lender, rates are typically higher than standard mortgage rates.
What combined LTV do I need?
Most second charge lenders require a combined LTV of 85% or less. This means your existing mortgage balance plus the new loan amount should not exceed 85% of your property value. Some specialist lenders may consider higher LTV ratios, but rates will generally be higher.
Can I get a second charge loan with bad credit?
It may be possible to obtain a second charge loan with adverse credit history, as some specialist lenders cater to borrowers with impaired credit. However, rates and terms are likely to be less favourable. The amount of equity in your property and your ability to afford the repayments will also be key factors in any lending decision.
How long does the process take?
A second charge loan typically takes between two and four weeks to complete, though this can vary depending on the complexity of your application, the lender, and how quickly any required valuations or legal work can be arranged. Some lenders offer faster processing for straightforward cases.
What can I use a second charge loan for?
Second charge loans can be used for a variety of purposes, including home improvements, debt consolidation, funding a major purchase, or raising capital for a business. The lender will usually ask about the purpose of the loan as part of the application process. Your home is at risk if you do not keep up repayments.
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Your home may be repossessed if you do not keep up repayments on your mortgage.