Perhaps it’s no surprise that a cost-of-living crisis is raging, but more and more homeowners are opting for a second mortgage.
Many people use the money to pay off debt such as credit cards and personal loans.
Others use the money to finance everything from home renovations and paying for a wedding to starting a business and even paying a tax bill.
Corresponding industry data, there has been strong growth in second-rate mortgage loans. Just over 2,800 second mortgages totaling £133m 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 demand is rising as borrowers look to raise additional capital.
A second mortgage is a loan that allows you to use any equity you have in your home as collateral. It effectively sits on top of your existing mortgage.
You will usually get one from a separate lender – there are a number of specialist firms. That means you have two mortgages on your house. However, the existing mortgage always takes precedence over the second home loan.
As with any mortgage secured on your property, failure to repay it can result in you losing your home.
For many homeowners who need to raise extra money, simply doing a remortgage or taking out another advance from the same lender is probably a better idea. 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, if they got a particularly good deal or just recently got a five- or 10-year fixed-rate agreement. Meanwhile, others don’t have these options available.
This is where second mortgages can come in — although taking one is a big step.
There are several reasons why someone signs up for one. If your existing mortgage has a high prepayment fee, it may be cheaper to get a second mortgage than a remortgage to free up equity from your home. says government-backed website MoneyHelper.
Meanwhile, for some people — for example, those whose credit ratings have deteriorated — refinancing their main mortgage could mean paying a higher interest rate on the whole, which would mean they would be paying more interest overall. When you take out a second mortgage, you only pay the higher interest rate and the additional interest on the new amount you want to borrow.
Another category of people who might choose a second mortgage are those who are self-employed and have difficulty accessing unsecured credit such as a personal loan.
“There’s a growing demand for second-charge mortgages,” says Nick Mendes of John Charcol.
One of the most common reasons someone might consider one is because their current mortgage lender doesn’t allow them to raise additional funds, he says.
“Secondary lenders often have a cheaper appetite for credit/borrowing,” adds Mendes.
Even though it’s secured against your house, you can spend the money however you like.
Traditionally, DIY has been the number one use in terms of what people do with the money. However, the Finance & Leasing Association recently pointed out that many people do to consolidate their debt.
But that probably means people convert unsecured loans into secured loans, and if they don’t pay their second mortgage, the lender could start an ownership process.
Just like standard mortgages, interest rates on second mortgages have risen. As recently as January of this year, rates on the second fee were just 3.95%, but around 5% is now more of a typical starting point, Mendes says. Some companies charge a little more than that.
“Interest rates can be much higher than first mortgages,” states MoneyHelper’s website.
It adds, “If you need to borrow a small amount of money, you might be better off going with an unsecured product like a personal loan.”
Lenders offering second-charge mortgages include Shawbrook Bank, West One, United Trust Bank, Pepper Money and Oplo.
The affordability requirements for second mortgages can be less onerous than for regular home loans. “Income affordability is a bit more generous for both employees and the self-employed,” says Mendes.
Meanwhile, many second-fee lenders allow you to overpay or offer other flexible features.
However, this is one of those areas where it can really make sense to speak to a mortgage broker who can look at your overall financial situation and individual circumstances to see what’s best for you.