Second Charges Explained

When you take out the original mortgage on your property, that lender will usually take the first legal charge. If, for whatever reason, you take further borrowing from another lender and they take a charge against your property, that lender will usually have a second charge. Why is it called a second charge? Because someone has the first charge.

The financing costs associated with first-charge lending are usually lower than that of second-charge lending. This is primarily because, if anything was to happen, the first charge lender would be repaid before the second charge lender.

So, if the borrowing with first charges is lower, why would anyone ever seek a second charge? There may be a number of reasons why you may seek second-charge borrowing. These include:-

1) You are unable to increase the borrowing with the first charge lender. Each lender has their own affordability calculation and your request may be outside these parameters. Second-charge lenders may allow you to increase your borrowing potential to up to 6 times your income.

2) You wish to borrow for a specific purpose. If you have had a large tax bill land on your doormat, many first-charge lenders will not allow further borrowing for this whereas a second-charge lender may consider it or raising capital for other legal purposes.

3) You are looking to consolidate other debts. Some second-charge lenders may lend more than the first-charge lender and this could be useful if you have expensive debt elsewhere and wish to consolidate it. However, you should carefully consider the consequences of securing an unsecured debt against a property. If you fail to meet your repayments you could be putting your house at risk.

4) You may be locked into a deal with early repayment charges on your first charge borrowing and the further advance terms may be prohibitive. Second-charge loans can be seen as a 'sticky plaster'. For example, you may have a mortgage with redemption penalties for a further two years which you do not wish to disturb. If a further advance is not an option, a second charge could be considered for further borrowing. Then, when the main borrowing deal expires, you could look to consolidate the first and second charge at the same time.

5) Second charges are also available on buy-to-let properties as well. With changes in lender's rental calculations, you may find that you have been able to borrow more from your lender if you considered a 5-year fixed rate product. However, what if you want to increase your borrowing within the 5 years and you cannot get further borrowing from your current lender? Remortgaging may not be possible as you may have early repayment charges on your current deal. This could be another example where a second charge could be considered.

If you are considering increasing the borrowing on your property, you should consult your first charge lender to see what options are available. Thereafter, you can explore alternative options which may include second charges so you can make an informed decision.

This article is for general information purposes only and does not constitute advice. The author does not accept liability for any errors or omissions. Readers are recommended to take professional advice from a suitably qualified professional regarding their own personal circumstances.