A lot of people use them to raise money instead of remortgage. The borrower should also understand that they are always paid off at the same time as your first mortgage.
What is a second mortgage?
A remortgage agreement allows you to pay off your existing mortgage and switch to a new mortgage provider, so you still have a mortgage to pay. However, you might consider remortgage or getting a second mortgage for the same reason: to raise additional funds.
Despite what the name might suggest, a second mortgage is not quite the same as a traditional mortgage, but rather a secured loan. While a mortgage is technically a secured loan on the property you buy, a second mortgage is a secured loan on the home you currently own.
This means that if you took out a second mortgage, you would have two loans or two secured mortgages on the same property.
A first mortgage, or standard mortgage, is a loan based on your credit rating, the amount of your deposit, your income, and your overall ability to pay off debt each month. Whereas a second mortgage is a loan based on the equity available in that same property.
How Home Equity Affects a Second Mortgage
Equity is the amount of money you’ve already paid on the property through your deposit and previous mortgage payments. So basically equity is the value you own on the property minus the current mortgage on the property.
Essentially, you can calculate this by seeing what the mortgage owed on your property is in relation to the value of the house. For example, if your house is worth £ 350,000 and you have a remaining mortgage of £ 300,000, then your equity / the money you have already paid off on the property is £ 50,000.
You will still need to prove your income and your ability to pay off the monthly payments on the second mortgage, but the amount a lender will give you will be based on and secured by the equity in your home. In the example above, that would be £ 50,000.
Your equity can also increase with the value of the property.
A second mortgage allows you to get a secured loan against the equity in your property. So, in the example above, you could get a loan of up to £ 50,000, depending on your credit rating and your ability to pay off both mortgages at the same time.
Second mortgages usually allow you to borrow money from as low as £ 1,000. The higher the equity in your property, the more money you will be able to borrow.
Can I get a second mortgage?
To apply for a second mortgage, you don’t necessarily need a very good credit rating. In fact, in some cases, you will still be able to get a second mortgage with a bad credit rating.
Obviously, in order to be considered for a second mortgage, you will need to be a homeowner. However, you don’t necessarily need to live in the property on which you are taking out the second mortgage.
There are several reasons why you might want to take out a second mortgage. However, before you determine if you can get one, weigh your options, a second mortgage can be a risky financial decision.
If you are considering a second mortgage, the first thing to do is figure out how much you need and what you are going to spend it on. You may be able to consider other ways to borrow money with less risk.
For example, if you plan to borrow a few hundred to a few thousand pounds, you might want to get a credit card. Some 0% buy credit cards will allow you to avoid paying interest for up to 18 months, and sometimes more.
Likewise, personal loans could be cheaper than a second mortgage, although you would need a very good credit rating for many of these options.
The advantages of a second mortgage
The main attraction of a second mortgage is that people with less than perfect credit or bad credit may still have a chance of getting approved.
Plus, it might be easier to get a second mortgage even if you have fluctuating income or are considered self-employed.
But before you apply for a second mortgage, contact your existing mortgage provider. Ask them if they are able to give you a prime rate or loyalty bonus if you were to take out an additional loan through them. If not, write their rates down anyway, as it could be cheaper than getting a second mortgage.
It is equally important to shop around with other lenders. See what their loan rates look like so you get a good idea of how much APR you might be paying. Even if you decide to ditch the idea of getting a second mortgage, you might find a personal loan deal that’s right for you.
Get all the facts, such as prepayment charges, if any, the APR amount, and what you should be paying off each month and for how long.
Second mortgage rates
Another reason people are considering getting a second mortgage is that it might turn out to be less expensive than remortgage when you want to raise extra cash. In the example below, we’re looking at whether it’s cheaper to remortgage or get a second mortgage.
Say, for example, you pay a mortgage loan of £ 250,000 on a five-year fixed rate contract. You have one year left on that five-year deal, and you’re looking to move on to a new deal and raise an additional £ 10,000 before your mortgage eventually goes to a higher interest rate. However, the remortgage agreement has a prepayment penalty of £ 5,000.
If you were looking to earn an additional £ 10,000 on the equity in your home, the remortgage would cost you at least £ 5,000 for the prepayment of the mortgage. On top of that, you will have to pay the interest on your new mortgage contract. You might have gone for a better deal, but once that is over, you have no guarantee that the rest of the mortgage will be cheaper.
With a second mortgage, you keep paying your first mortgage, so you don’t have to pay the prepayment penalty. However, your £ 10,000 loan will most likely have a higher interest rate than your remortgage contract.
Calculate the interest you will need to pay on a second mortgage
Calculate how much interest you are likely to pay on your first “worst-case” mortgage. Plan your repayments if interest rates were to rise significantly on your first mortgage. If it’s still cheaper than the rate you’ll get on your second mortgage, then you know how to avoid taking out another secured loan.
Likewise, if you don’t have an expensive prepayment penalty on your mortgage, remortgage will almost always be cheaper in the long run.
Remember that a second mortgage is secured against your home, so if you fail to repay, your property could be repossessed. You’ll have two mortgages that leave your home at risk, so it’s best to avoid it if you’re on the verge of successfully paying off your existing mortgage.
Even if you decide to sell your home while having both mortgages, the money will be used to pay off your first mortgage before some of it is used on your second mortgage debt. This means that if there is money left on your second mortgage after you sell your home, the lender will continue to sue you for the outstanding debt.