How to get a second mortgage
By Kate Saines
If you are thinking of buying a holiday home, an investment property or simply need some extra cash for a big project then a second mortgage could be the financial solution.
Second mortgages boast certain advantages over re-mortgaging, are cheaper than unsecured loans and in many cases allow borrowers to take out larger sums of money.
But with the mortgage market such a difficult place to enter, are lenders still willing to offer these loans and, if so how do potential 'second mortgage borrowers' fulfil their criteria?
We've tapped into the knowledge of independent financial adviser, Andrew Coles of Beard & Coles, to find out.
What is a second mortgage?
A second mortgage is a loan secured on a property, on to which there is already a first mortgage secured.
The first and second loans are separate and they are paid back independently of each other, they often come from two separate lenders and the borrower will therefore need to make two monthly repayments.
Andrew Coles explained when you take out a second mortgage, the existing mortgage remains the first charge on the property.
"If you default on the mortgage, the first mortgage has to be paid first before the second one is paid off," he said.
How do second mortgages differ from remortgages?
Remortgaging involves switching from one lender to another, and usually borrowing additional funds in the process.
As a result, when you remortgage, you'll only have one monthly repayment to make to one lender.
Mr Coles said there were certain advantages second mortgages held over remortgages.
"A remortgage can sometimes offer a lower rate than a second mortgage, although the fees and charges may be higher," he said.
"You may also want to avoid moving your main mortgage. For example, you may have an excellent deal on your mortgage or your circumstances may have changed since you took out the loan."
Are there any other advantages?
According to Mr Coles, because a second mortgage is a secured loan, lenders are able to offer a lower rate of interest than a standard non-secured loan.
With many people using second mortgages to fund repairs or improvements to their home, buy a new car, consolidate debts or pay for their wedding, it makes it a great alternative to a personal loan.
You can also, generally, borrow a larger amount of money with a second mortgage than with an unsecured loan. But, points out Mr Coles, this depends on the amount of equity in your property.
Read more: What will happen to house prices for the rest of 2011?
And what are the downfalls?
Taking out a second mortgage instantly reduces equity in your home whilst also increasing your mortgage repayments.
Not only is this not great for your bank balance, but it puts you at a greater risk of defaulting and potentially having your house repossessed.
Mr Coles said you should expect the second mortgage to have a higher interest rate than the first mortgage because the lender is taking a bigger risk on this 'second charge' on your property.
And he pointed out that before you arrange a second mortgage you'll need to seek the permission of the existing mortgage company – a process than can often create complications.
How can I get a second mortgage?
It's likely, if you are thinking of a second mortgage, you are in need of cash to pay for home improvements or a big purchase.
You might also be looking to buy second property as an investment or a holiday home.
Whatever the reason, you'll need to provide enough equity to the lender, prove you will be able to repay the loan, have a good credit history and fulfil all the other criteria required to get a first mortgage.
The rate you receive on the second mortgage will be calculated in the same way as the first, using the loan to value and affordability levels.
But, warns Mr Coles, expect to be probed even more thoroughly for the second.
The reason for this is that when providing a second mortgage, lenders are taking a much bigger risk because if you default on repayments, your first mortgage lender has priority on any money available.
Mr Coles explained: "If you do fail to keep up your repayments, your second mortgage lender will only receive any money once the demands on your first mortgage lender have been satisfied."
As a result second mortgage lenders are likely to be stricter on their lending criteria.
Are second mortgages a good option?
There are some instances when second mortgages provided the best solution for a clients' problem.
The best example is the case of a client locked into a five-year fixed-rate mortgage at an excellent rate with three to four years remaining on the fixed period who needs extra money from the property for home improvements.
"If they remortgaged," said Mr Coles, "they will face a big repayment charge and lose the good rate. Therefore they would be better off keeping the original mortgage and taking out a second mortgage for the home improvement."
This way they would only pay the higher fee for the extra money borrowed, not the whole loan.
But, in general, Mr Coles said second mortgages suited only a small number of clients and he admitted, in most cases, a remortgage was easier and cheaper for many borrowers.
"Second mortgages are cheaper than an additional secured loan, but are more expensive than a remortgage because you require the authority of the first mortgage lender in involves more paper work and stricter criteria.
"Therefore unless there is a good reason not to remortgage (for example, you have an excellent current deal) generally [remortgaging] is the first option."
Use te Myfinances.co.uk comparison tools to find the best deal on a new mortgage.
Sign up to the Myfinances.co.uk newsletter to receive the latest financial news direct to your inbox.
Follow Myfinances.co.uk on Twitter: @news_myfinances
Comments
Newsletter sign up