How Easy to Get a Second Mortgage
Can I get a second mortgage? This question is asked by a lot of forum and internet users, and we're here to answer it in detail.
You may be asking this question for one of two reasons. The term "second mortgage" is used to refer to two different products that are used for different purposes. But don't sweat it – because we're answering for both situations.
Let's explain…
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Can you get a second mortgage if you already have a mortgage?
If you already have a mortgage it is possible to get a second mortgage. You could get a second charge mortgage, which is a second mortgage on a property that already has a first charge mortgage, i.e. a mortgage you used to buy the property. Or you might be able to get a second mortgage to buy another property (either a residential or buy-to-let mortgage).
A second charge mortgage is a second mortgage on one property that allows you to borrow against home equity. For example, if you have £100,000 home equity, you could take out a second charge mortgage for £50,000 to receive a lump sum payment and use as you wish. You'll now have to pay your first and second mortgage to own your home outright, which will be paid through separate monthly payments. Your home is used as collateral.
Second charge mortgages are usually shortened to just second mortgages, which creates confusion because people also use "second mortgage" to refer to buying another property with a second first charge mortgage.
To add to the confusion even more, some people use the money borrowed against home equity in a second charge mortgage to help buy another property, such as a holiday home.
To summarise, you could:
- Get a second mortgage to buy another home, which is a second first charge mortgage
- Get a second charge mortgage as a way to borrow against home equity and use the money as you wish
- You might choose to use the second charge mortgage loan amount to help fund another home purchase
Getting a second mortgage in any situation is a big deal and should only be done after serious consideration. If you do want to borrow on a second mortgage, make sure you only use a lender that is authorised and regulated by the Financial Conduct Authority (FCA). If they are not regulated by the FCA, they are operating illegally and could be a scam.
Can I get a second mortgage?
To get a second charge mortgage you will need to be eligible to apply. The first thing you will need to have is enough home equity as this is what your second mortgage will be borrowed against.
Home equity is the value of your home you currently own without any attached debt. You can work it out by subtracting your first charge mortgage balance away from the current* value of your home. For example, £220,000 (home's value) minus £100,000 (remaining mortgage) gives you £120,000 home equity. If you have any other debts attached to your property, you'll also need to subtract these amounts from your home's value to work out the equity in your property.
Taking out a second mortgage requires the lender to accurately calculate the amount of equity in your property. You may need to pay a fee for them to complete an appraisal. You should not assume that the property is worth the same amount as you paid for it, even if you only bought it in the last year or two.
Many lenders require you to take out a minimum amount when getting a second mortgage. As you cannot borrow against 100% of your home equity to prevent the risk of getting into negative equity (owing more on your first and second charge than what the property is worth because it decreased in value), you will need to have more equity in your home than the minimum amount you can borrow.
Even if you have the required home equity to get the loan amount you need, this doesn't mean you will automatically be approved for credit secured against your home equity. You'll be subject to affordability checks, meaning your income will be assessed against all existing debts. This includes personal loans and credit cards as well as your first mortgage. And your credit score will be checked to see how you have repaid lenders back in the past.
If you start looking for second charge mortgages, make sure you also search for home equity loans and home equity lines of credit, better known as HELOCs. These products are types of second charge mortgages.
Getting a second mortgage in the UK
Second charge mortgages and home equity loans are widely available through UK banks and building societies. Some online banks and lenders may also offer these methods of credit. However, unlike other loans these are not as widely advertised and you may need to search for HELOCs instead, which appear to be used more often within web pages. Just be aware that a HELOC works slightly differently because the loan is not paid out as a lump sum.
You may have to speak with your local bank branch rather than rely on their website for information on second charge mortgages.
Another option is to use the services of a credit broker or mortgage consultant. They could save you time by searching the market on your behalf, but their services come with either upfront costs or commission – or both.
Is it hard to get a second mortgage? (second charge)
It is generally considered harder to get a second charge mortgage than it is to get a first charge mortgage. The reason for this is because you are adding more debt to your home and increasing your lending risk.
However, this is a blanket assumption and not always the case. You may have lots of equity in your home and want to take out a second mortgage that is secured against a small percentage of that equity. Or you may have a significant income that can easily cover what you want to borrow. The decision will be based on affordability, which is discussed in more detail later.
The bottom line is that the difficulty in taking out a second mortgage is a completely personal affair. Some people may find it really easy to get second mortgages while others may be rejected at every turn.
The benefits of a second charge mortgage
Choosing a second charge mortgage as a way to access credit can be beneficial. Because you are borrowing against home equity, you may be able to access a larger loan amount this way than using a personal loan or credit card.
As such, these mortgages are often used to complete home improvements, such as installing a fancy new kitchen or converting a loft. Doing this can actually increase the value of your home and therefore increase your home equity again. But you're not restricted to completing renovations. You can use the money as you like from buying cars and trips abroad to debt consolidation.
Another potential benefit of using a second charge mortgage is that you might get a lower rate of interest compared to other options. Secured loans generally provide lower rates because the lender feels more comfortable when an asset is listed as collateral within the credit agreement.
A more nice benefit of using a second charge mortgage is it can help you avoid an early repayment charge on the first mortgage in comparison to refinancing/remortgaging your first mortgage. However, there may be other fees associated with a second charge loan that could wipe these savings out.
The risks of a second charge mortgage
There are multiple risks when you choose to get a mortgage a second time on the same home. The main one is risking your family property.
By securing further debt against your home, you are risking the property. If you don't keep up with your agreed payments then the home may be repossessed and the lender will sell your home. Once they sell your home, the money raised will first be used to pay back the first charge mortgage lender and then the second charge lender. If there is anything remaining you will receive the money, but if there is a shortfall due to negative equity then you could land in serious debt, possibly requiring bankruptcy.
One way of mitigating the risk of not being able to afford your mortgages is to never overborrow against your equity or to seek alternative methods of credit. If you feel uncomfortable using your family home as collateral then you may want to look at other secured options or consider unsecured credit, such as a personal loan.
Can I get a second residential mortgage?
As mentioned at the start of our guide, it is possible to get a second residential mortgage to buy another property. This involves applying for a separate first charge mortgage to buy the property not related to your existing property and the first charge mortgage you are paying for that. Many people choose to buy a second property as a holiday home or as an investment. If you want to rent out the property you will need a buy-to-let mortgage instead of a residential mortgage.
To get a second mortgage to buy other property, you will need to have a large enough deposit. Mortgage lenders will not lend you all of the money to buy the second property so you will need to have saved enough cash for the down payment. In general, this means saving at least 20% of the purchase price as lender's have an average Loan to Value (LTV) ratio of 80%, meaning they will lend you 80% of the asset's worth at most.
But having enough of a deposit is not all that is required to get a mortgage for a second home. Again. You'll need to suffice affordability checks by comparing your income to all existing debts and you'll have your credit file checked to ensure all debts have been disclosed and you have proven to keep up with repayments elsewhere.
If the second property you are buying is going to be a rental investment with a buy-to-let mortgage, you will probably need a larger deposit and as much as 40% of the property purchase price. The reason for this is that mortgage lenders see buy-to-let properties as a greater risk. Relying on tenants to pay rent on time and contribute to your mortgage repayments is a risk to them so they require a bigger deposit.
Also mentioned earlier was that some homeowners decide to borrow against their existing home with a second charge mortgage to raise money for a downpayment. This can be an advantageous method when buying a second home, but it won't always work.
The reason it may not work is that this creates another debt and the mortgage lender will assess all exciting debts against your income. They could decide that because of the additional debt you cannot afford two mortgages on one property and a further mortgage on the second home.
Is it hard to get a second mortgage? (second first charge)
Getting a second residential mortgage or a buy-to-let mortgage can be trickier than getting your first mortgage if you still have that first mortgage to pay back. To be approved for any mortgage you are required to provide all information about your income and existing debts. Having an existing mortgage when applying for another means you will have to tell the lender about this ongoing debt.
The lender will analyse your debt to income ratio and because you already have a mortgage the ratio will likely be higher than when you took out your first mortgage. For this reason, it can be somewhat harder to get a second mortgage – but that doesn't make it impossible. Scores of UK residents are able to prove they can afford two or even more mortgages with their income.
When the lender is checking you can afford all existing debts and the proposed new mortgage based on your income, they are not just subtracting these debts from your income to see if it keeps you in the black or puts you in the red. They recognise that a significant amount of your income must be spent on bills and living expenses. Thus, the amount of debt must only be a proportion of your income.
There is no fixed percentage of your income that your debts must be within. Some lenders will want all debts to be paid with around 30% of your income, while others may allow you to use 40% of your income to repay ongoing debts. This ratio may also affect the interest rate you are offered to mitigate any lending risk. On top of this, your credit file will be checked to make sure you have paid back other creditors as agreed.
In a nutshell, the difficulty of getting a second mortgage is greater than taking out your first, but it mostly comes down to personal circumstances and finances.
Can I get a second mortgage with no equity?
It is not possible to get a second charge mortgage with no remaining equity in your property, but you could still be able to borrow on a second first charge mortgage to buy a second home.
Because a second charge mortgage is secured against your home equity, with no equity there would be no collateral available and nothing for you to borrow against. This is why you must have sufficient equity to get a second charge mortgage. You can grow your equity by continuing to pay on your existing mortgage, providing your property does not drastically decrease in value.
You could potentially get a second first charge mortgage with no equity in another property as long as you can cover the deposit required to buy the property and prove you can afford the second mortgage.
However, if you have no equity in your first home then that suggests you have additional debts already tied to this property or the property has decreased in value. If it is the former, then these additional debts may make it harder – but not impossible – to prove you can afford the second first charge mortgage.
Can I get a second mortgage – a quick recap!
To recap on this topic, you can get a second mortgage if you already have an existing mortgage. This could mean borrowing against home equity with a second charge mortgage on the same property, or it could mean getting a second first charge mortgage to buy another property, maybe as a rental investment or a holiday home. You'll need to show you can afford either loan to be approved.
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More second mortgage support right here!
This was a great introduction into the world of second mortgages. If you're thinking about applying for a second charge mortgage, we have plenty more useful guides for you.
Read them for free right here on MoneyNerd and avoid the pitfalls of borrowing against your home. All our content is free and written to make things clearer to those without a degree in finance.
Source: https://moneynerd.co.uk/can-get-second-mortgage/