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Second charge loans can be very real alternative to a remortgage. While every application needs to be considered on its own merits, the second charge industry has recently become more competitive and attractive with lender rates now starting from 4.50%.
Reasons for considering second charge loans:
1 – Keeping your existing low rate mortgage
You may have a very low rate lifetime tracker first mortgage. Many lifetime trackers were sold a number of years ago with some lenders offering rates of 0.25% (or lower) above BBR. You may have explored the current market and it is not possible to remortgage to an equivalent or lower rate.
This is clearly a scenario where a second charge loan should be considered. For example, if you have a base rate tracker mortgage of £500k at a rate of 0.75% (0.25% above base rate) and want to raise £50k, it is more likely that a second charge loan is a better option than remortgaging.
2 – Avoiding early repayment charges
If you face high early redemption charges (ERC) on your first mortgage in the next 2 years.
Rather than remortgage and pay high ERC’s, it may be beneficial for you to take out the required additional borrowing by way of a second charge loan. Then when the ERC’s no longer apply on the first mortgage, you can remortgage safe in the knowledge that you will only be charged one month’s interest deferred by 28 days (2 months in total) for a second charge loan
3 – Purpose of Loan
You may want to raise additional funds to use on a purpose that your first charge lender is not happy with.
Second charge lenders are generally more flexible than the mainstream first mortgage lenders when it comes to the purpose of loan and can include
• Paying off a tax bill
• Deposit for a BTL
• Purchase an overseas holiday home
• Gift to children for a deposit
• Paying off school / university fees
• Transfer of equity (paying off a partner)
• Business injection
Many of the above purposes are considered unacceptable by a number of first charge lenders.
4 – A Further Advance is not available
You may have approached you existing first charge lender for a further advance, but have been unable to obtain the amount required.
The first charge lender may have declined a further advance for a number of reasons. Typically this might be due to insufficient income, adverse credit or simply because your first charge lender is no longer lending. Second charge lenders often have a different approach to assessing income and adverse credit. If a client is clearly benefiting from the loan and more importantly can afford the loan, lenders are prepared to look at individual applications on their own merits.
5 – Keeping your Interest Only Mortgage
You may have a very low rate lifetime tracker first mortgage, but have been told that the only way you would be able to obtain further borrowing is if your current mortgage arrangement which is interest only, is switched to“repayment”. In doing this your monthly payments would rise dramatically making it potentially unaffordable.
Since the Mortgage Market Review (MMR) a number of lenders have dramatically changed their lending criteria in relation to offering Interest Only as a repayment method especially for main residence mortgages.
For example, if you have a base rate tracker mortgage of £500k at a rate of 0.75% (0.25% above base rate) and want £50k, it is more likely that a second charge loan is a better option than remortgaging
6 – Bridging
A short term loan may be needed to update your property before putting it on the market to sell and you are hoping that the whole process will take around 10 – 12 months.
While bridging finance undoubtedly has its place in the lending market there are a number of situations where a longer term loan may be a better option. A longer term second charge loan would give you more flexibility allowing you to complete the works and sell the property at your own pace taking away the pressure of having to sell your property quickly and repay the bridging loan within say 12 months. With a second charge loan you can borrow over a term of up to 300 months safe in the knowledge that the ERC at time of redemption will be one month’s interest deferred by 28 days.
I hope that helps and if you need any assistance please do not hesitate to ask and complete the contact form below.
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