A Guide to Second Mortgages
Some people may know second mortgages as a ‘secured loan’ or a ‘personal loan’ or even equate it to a home equity loan. Yet, if you’re taking your first steps into the property market, there’s a chance you won’t understand what it is… Luckily, we’re going to explain to you what a second mortgage is and why it could be an option for you in the future.
Luckily, second mortgages aren’t as bad as they sound. They don’t mean that you have to carry on paying for your house once you’ve paid off your original mortgage. A second mortgage is a secured loan taken out on a property that is already mortgaged. Confused? Well, MO are here to help simplify…
A second mortgage is secured against your own asset as collateral. Property owners can use this as a means of raising money instead of re-mortgaging. But, is it the right thing to do? We’re going to tell you all the info, so you can see if they’re an option for you to consider.
How do second mortgages work?
So, we’ve explained briefly what a second mortgage is and now you’re either wondering how to get one or if it’s worth it…
You’re only eligible to get one once you’re a homeowner. This means that lease or license holders are excluded from this.
A second mortgage doesn’t require that you live in the property. For second mortgages, there can be a fee of anything ranging from the £1,000 onwards. It’s vital to remember that like with any mortgage repayment, second mortgages being secured against your property means that you could lose your home if you fail to repay it.
What this essentially means is that you will have two mortgages on your home. This is because a second mortgage means you can use an equity stake in your house, or a possession, as security against second mortgages or ‘loan’. For those of you who aren’t sure of what equity means, it’s basically a share or percentage in your property which is owned by you. This can be worked out as the value of the home minus any mortgage owned on it.
Will I be able to get a second mortgage?
When lenders are deciding whether a borrower is legible for a loan, there are various factors that need to be taken into account. Here are a few:
- Mortgage advice
Lenders will assess the mortgage repayments that they believe you can afford given your credit score, history, income and existing commitments.
This may mean looking at previous debt repayments and your expenditure. But don’t be alarmed. Although this might come across a tad on the intrusive side, this is done so that you end up with a mortgage that matches financial means – so you can afford the repayments.
Though lenders, brokers and independent financial advisors (IFAs) must offer advice and research the options available to you fully, you can choose to reject their advice in favour of your own research. While we would not recommend this, especially if you are new to the property game, if you do opt to conduct your own research and rely on this, this will be called an ‘execution-only’ application.
- Affordable Lending
Lenders will also seek to assess your household income. This will look at your basic salary and any additional income you receive from things like a business project, freelance work or bonuses.
Affordability is vital. If you can’t afford regular household bills and other financial outgoings without room to breathe, are you likely to be able to handle another commitment such as a second mortgage?
There’s no universal way that lenders check these things. However, these factors are usually taken into account as a way of assessing whether you’re capable of mortgage loan repayment. You may also have a credit reference agency look at your financial history to assess how much of a risk you may be as a borrower, depending on whether you’re a clear-cut case or not.
- Dealing with payment difficulties
Dealing with payment difficulties is not easy. Therefore, it’s important to make sure you budget properly. The best way of doing this would be to find your essential and non-essential outgoings so that you can work out how to spend your money more wisely.
Though, having said that, deciphering what is essential and non-essential outgoings isn’t an easy task either. But fear not, we’re here to help. We recommend that you look at utility bills as essential outgoings. So that means gas, water, and electric bills. Non-essential items can be easily cut back with the right willpower. So, that might mean you have to cut that gym membership you’ve not quite got around using. If you’re paying money for things you aren’t using consistently or to your benefit, be brave and get rid of them. You’ll save loads in the future.
This will be vital for lenders to ensure that you have the means to pay for mortgage loan repayments.
Why should I take a second mortgage out?
Second mortgages can be a great option if you’re struggling to get a loan. This can be because your credit score has gone down due to your first mortgage.
This may seem more preferable in comparison with re-mortgaging if you are already on a great introductory deal with your current mortgage lender and have a high Early Repayment Charge. A second mortgage will mean that you can keep your current mortgage on one rate, and borrow the additional amount you want on another.
While a second mortgage may seem like a good idea, seeking up to date financial advice is vital to ensure getting one is the best option for your financial requirements and the process goes as smoothly as possible. This can take the form of a broker, an IFA or another type of qualified financial advisor.
By getting this sort of help you can find the second mortgage which is right for you and is within your financial means. This is important to take on board.
In the instance of re-mortgaging, if you look to do this on your own, you can run the risk of taking out a mortgage which isn't best suited to you. This can, in turn, mean that if things start to go wrong, you could struggle to make repayments if you get a bad deal or spending more money than necessary.
Therefore, we recommend that you approach your lender and ask what they would charge for an additional mortgage. It may also be worth shopping around for the best deals by comparing the different lenders in the market. This may involve looking at the duration of the loan and the total amount you would have to pay back.
For the best mortgage rates and deals, use MO. We compare 1000s of mortgages from 100s of lenders, to find the right mortgage for you. We’ll also give you a life insurance quote as soon as you finish our mortgage application! Mortgages Online – mortgages made easy.