Second mortgages

As a homeowner, you may have the option of taking out a second mortgage. This involves getting a new loan secured against your property, which you repay alongside your primary mortgage.

Second mortgages are a way to access funds for home improvements or other financial needs.

Considering taking out a second mortgage? Keep reading for everything you need to know.

How does a second mortgage work?

A second mortgage, also known as a second charge mortgage, is an additional loan taken out against the equity (the percentage of the property that you own) in your property. It’s a completely new loan of over £1,000, separate from your primary mortgage. 

You can take out a second mortgage with a new lender or your current one, but the repayment terms will differ from your primary mortgage.

Note: These types of mortgages are not the same as a mortgage on a second property.

What’s the difference between a second mortgage and remortgaging? 

Second mortgages involve taking out an additional loan on your home, which means you have two separate mortgages, potentially with different lenders. 

On the other hand, remortgaging refers to changing your existing mortgage deal to a new one. You can do this with the same lender or by switching to a new lender, often to secure a better interest rate.

Getting a second mortgage

When you apply for a second mortgage, lenders complete affordability checks and a ‘stress test’. This includes checking your credit score and your monthly incomings and outgoings.

Lenders do this to assess whether you’ll be able to keep up with regular repayments – it’s the same as when you get a primary mortgage. 

You must also get permission from your primary mortgage lender before applying for a second mortgage.

A second mortgage may be an option if you want to consolidate debts or raise money to fund things like home improvements, business deals, or medical fees. However, make sure you understand the costs and can keep up with the repayments – if not, your home could be repossessed.

How much can I borrow on a second mortgage?

The amount you can borrow on a second mortgage depends on how much equity you have built up in your home. Equity is the value of your property minus what you owe on your first mortgage. 

Example: If your home is worth £250,000 and you still owe £150,000 on your mortgage, you have £100,000 of potential equity available for a second mortgage.

Lenders assess equity when you apply for a second-charge mortgage. Generally, having more equity improves your chances of getting a larger loan with lower interest rates. 

Your income also matters – higher income means a better chance of borrowing more.

Lenders typically offer between 75% and 100% of your home’s equity, with a minimum offer usually around £1,000.

Risks and considerations of second mortgages

Before taking out a second mortgage, it’s a good idea to:

• Explore existing options: Check if you can obtain a further advance on your current mortgage.
• Seek professional advice: Consult a qualified adviser to find a loan that aligns with your financial situation. Advisers follow the Financial Conduct Authority’s (FCA) rules, designed to protect you from unsuitable loans. Going without proper advice increases the risk of choosing an ill-suited loan, potentially hindering successful complaints.
• Compare lenders: Compare annual percentage rates of charge (APRC), total repayment amounts and loan durations to secure the best rate.
• Review terms: Understand the mortgage terms, including fees, early repayment charges, and interest rates.

Like any mortgage, there are risks involved. Failing to keep up with repayments can result in accumulating interest, putting your home at risk. Additionally, missed payments negatively impact your credit score. If your home is repossessed, your primary mortgage is paid off first, and lenders will pursue any shortfall towards your second mortgage.

Choosing a second mortgage may extend your repayment period. As a result, you could be making payments during retirement, covering both the loan amount and interest. This differs from retirement interest-only mortgages, where you only pay the interest each month.

Second charge mortgage interest rates

Interest rates for second mortgages are usually higher than initial mortgages because, in the event of home repossession, the initial mortgage lender is prioritised for payment over the second mortgage lender. If the sale proceeds don’t cover both loans, the second lender could lose out.

Apply for a Saga second mortgage

You can apply for a second charge mortgage with Saga today. We’ve partnered with Tembo Money, offering you expert mortgage advice across more than 100 lenders and 20,000 products, ensuring we find you the best-priced option that suits you. All high-street lenders are included alongside various smaller specialist lenders and building societies.