What Is a Second Mortgage and When Is It Useful?
What is a second mortgage? When is a second mortgage useful as compared to other forms of credit? These are but two questions asked by homeowners interested in learning more about using the equity in their properties as a financing tool. We will answer both in the following guide. Please understand that there is a difference between second mortgage and remortgage products. The difference can be crucial, depending on why you want to borrow.
Let us begin by first defining the remortgage option. A remortgage product is simply a new mortgage that replaces your existing loan. In some financial circles, remortgaging is known as 'refinancing'. Remortgaging your home involves taking out a new loan to completely pay off your existing mortgage – complete with a new set of interest rates, terms, and conditions. With that said, let's move on to the topic of second mortgages.
Additional Money You Borrow
A second mortgage is essentially an extra amount of money you choose to borrow on top of your existing mortgage. These kinds of mortgages are also known as second charge mortgages due to the fact that the lender places a charge on your title in case you default. Your primary mortgage lender holds the first charge while your second mortgage lender holds the second. If your house were to be repossessed and sold, the two lenders would be paid in that order.
Second mortgages are based on the amount of equity the borrower has to work with. Equity is the difference between what your home is worth and what you still owe on your mortgage. Let us assume the current value of your property is £150,000. Let us also assume that the outstanding balance on your mortgage is £100,000. That means you have £50,000 in equity to work with.
An institution willing to lend you money using a second mortgage product will offer you a certain amount based on your equity. This is called the loan-to-value (LTV) ratio. A 50% LTV on £50,000 in equity would mean you are eligible to borrow £25,000.
When Is a Second Mortgage Useful?
You have plenty of options for borrowing money as a homeowner with a relatively decent credit rating. You can apply for credit cards, take out personal loans, remortgage your property, or benefit from secured loans and second mortgages. So what would be a good case for a second mortgage? When are second mortgages useful?
According to the Money Advice Service, three good reasons for utilising a second mortgage are as follows:
- Poor Credit History – Your credit history may have suffered some damage in the years since you obtained your first mortgage. In such a case, attempting to remortgage your property in order to finance other things could mean you pay more in both interest and fees. A second mortgage could be cheaper because you are borrowing less money.
- Repayment Charges – You might also find the second mortgage useful if you were hoping to remortgage only to find out that your current loan includes significant early repayment charges.
- General Financing – Second mortgages are very useful for general financing needs when you do not need to remortgage. They are particularly useful to the self-employed who typically struggle to obtain other forms of credit. Second mortgages are easier to get because you are using equity as collateral.
Second mortgages are popular financing tools for people with equity. Perhaps it is the right option for you as well. The equity in your home could make you eligible for tens of thousands of pounds in financing.