10 things you should know about second-charge mortgages

If you’re a landlord with some equity in your investment properties, you may qualify for a second-charge mortgage. This underused way of obtaining a lump sum of money is proving beneficial in the current lending climate. 

If you need to undertake renovations, improve your buy-to-let’s energy efficiency or expand your portfolio, here are 10 things you should know about second-charge mortgages.

1. You must have equity to qualify: holding equity in a property, also called capital, is something many landlords find themselves fortunate enough to have. The latest house price indexes show property values continue to trickle upwards, while data from statista.com revealed UK house prices have increased by more than 50% since 2015.

2. You could borrow up to 75% of your equity: how much a lender will loan you depends on how much equity there is in your buy-to-let. Although every borrower will be assessed individually, it’s usually possible to borrow up to 75% of your equity.

3.  You’ll need permission from your original mortgage lender: a second-charge mortgage can’t be taken out without due diligence. The borrower will need permission from the lender of their primary mortgage before a second-charge mortgage can be agreed.

4. You’ll need to pass affordability checks: having equity doesn’t automatically qualify landlords for a second-charge mortgage. The application process will include affordability checks and a ‘stress test’ to ensure repayments can be made. 

5. You can use the proceeds however you like: unlike a main mortgage, which must be used to buy a specified property, a second-charge mortgage results in a lump sum of money paid to the landlord for their own use. Commonly, the cash is used to fund improvements and renovations, to put a deposit down on another buy-to-let, or to consolidate other debts with a higher interest rate.

6. The repayment rate may be cheaper than remortgaging: many landlords remortgage and borrow extra money at the same time. Presently, this can prove expensive, with early repayment charges and mortgage rates that have doubled in the last five years. A second-charge mortgage can work out a cheaper way of borrowing money. The landlord keeps their current buy-to-let mortgage – a perk if it’s at a low rate – and only the second mortgage amount incurs a different rate. 

7. A second-charge mortgage rate may be cheaper than an unsecured loan: although second-charge mortgage rates will almost certainly be higher than that of a main mortgage, they generally work out cheaper than taking out a personal loan, a bridging loan or a credit card. 

8. The second-charge mortgage needs repaying: of course, there will be monthly repayments but the balance will need repaying when the buy-to-let is sold. If this is not possible, there may be the option to transfer the second-charge mortgage with you to another property.

9. You may be better off with a further advance on your existing mortgage: landlords who need a lump sum of cash should also explore the rates and repayment terms attached to getting a further advance from their current mortgage lender. Using a mortgage broker or financial adviser to compare and contrast loans is vital.

10. Your property may be at risk: a second-charge mortgage is secured against the property so there’s a real risk of repossession if the landlord falls behind with repayments. A lender will look to sell the property if the debt can’t be repaid. 

Talk to us about all things lettings. We can advise you on buy-to-let strategies and put you in touch with a recommended mortgage broker.