Second mortgage: Loans soar as Britons struggle to pay off debt | Mortgages
It may come as no surprise with the raging cost of living crisis, but a growing number of homeowners are opting to afford a second mortgage.
Many people use this money to pay off debts such as credit cards and personal loans.
Others use the money to finance everything from home renovations to paying for a wedding, starting a business and even paying a tax bill.
According to industry data, there has been strong growth in second mortgages. Just over 2,800 second mortgages, worth a total of £133million, were taken out by homeowners in May this year. This is 43% more in number and 53% more in value than in May 2021.
Mortgage broker John Charcol says he is seeing an increase in demand as borrowers seek additional capital.
A second mortgage is a loan that lets you use the equity in your home as collateral. It effectively adds to your existing mortgage.
You usually get one from a separate lender – there are a number of specialist companies. This means that you will have two mortgages on your house. However, the existing mortgage will always take precedence over the second home loan.
As with any mortgage secured on your property, failure to pay it off could mean you lose your home.
For many homeowners who need additional funds, it’s probably best to simply remortgage or take out an additional advance from the same lender. Or, depending on the circumstances, take out something like a personal loan.
But for some, it wouldn’t make sense to refinance their main mortgage – for example, they might be on a really good deal or have only recently signed a five- or ten-year fixed rate deal. Meanwhile, others do not have these options available.
This is where second mortgages can come in – although getting one is a big step forward.
There are several reasons why someone might sign up for one. If your existing mortgage has high prepayment charges, it might be cheaper to take out a second mortgage rather than remortgage to free up the equity in your home, says the government-backed MoneyHelper website.
Meanwhile, for some people – for example, those with deteriorating credit ratings – refinancing their primary mortgage could mean they have to pay a higher interest rate overall, which would mean pay more interest overall. Taking out a second mortgage means paying only the higher rate and additional interest on the new amount you want to borrow.
Another category of people likely to opt for a second mortgage are the self-employed who find it difficult to access unsecured loans, such as a personal loan.
“There is a growing demand for second mortgages,” says Nick Mendes of John Charcol.
One of the most common reasons someone might consider one is that their current mortgage lender won’t allow them to raise additional funds, he says.
“Secondary lenders often have a more favorable lending/borrowing appetite,” adds Mendes.
Even though it’s secured against your home, you can spend the money however you want.
When it comes to what people do with money, home improvements have traditionally been the number one use. However, the Finance & Leasing Association recently reported that many people do this for the purpose of consolidating debt.
But that probably means people are converting unsecured credit to secured credit, and if they don’t pay their second mortgage, the lender could start possession proceedings.
As with conventional mortgages, rates for second mortgages have gone up. As recently as January of this year, second-charge interest rates were as low as 3.95%, but around 5% is more like the typical starting point now, Mendes says. Some companies will charge a little more than that.
“Interest rates can be much higher than for first mortgages,” says the MoneyHelper site.
He adds: “If you need to borrow a small amount of money, you might be better off opting for an unsecured product such as a personal loan.”
Lenders offering second mortgages include Shawbrook Bank, West One, United Trust Bank, Pepper Money and Oplo.
Affordability requirements for second mortgages can be less onerous than for standard home loans. “Income affordability is slightly more generous for employees and the self-employed,” Mendes says.
Meanwhile, many second charge lenders will allow you to overpay or offer other flexible features.
However, this is one of those areas where it can really be a good idea to talk to a mortgage broker who can look at your overall financial picture and personal situation to see what would be best for you.