Whether you need money to refurbish your kitchen, repay debts or convert your loft, you may be able to get the funds you need through your most-significant investment — your home. Paying off your mortgage every month means you are continually building up equity, which is how much of your property you own outright. Your equity also increases if your home goes up in value.
So, how do you unlock the cash that’s tied up in your house? One way is to remortgage. This is when you get a new mortgage and use the funds to pay off an existing one. You could get a new mortgage that’s bigger than what you owe on your old one, then you have the leftover funds to pay for whatever you need. For example, if you have £180,000 left to pay, remortgaging for £200,000 gives you access to an additional £20,000.
However, another option is a second charge mortgage. This is exactly as it sounds: a second mortgage that’s taken out alongside the primary mortgage and secured against the property. This financial product appears to have grown increasingly popular in recent months, with some providers reporting over 40% more interest in secured loans last year.
This article explains the key differences between remortgaging and second charge mortgages, and which might better suit your needs.
What is a second charge mortgage?
While your mortgage is a loan secured against your home, a second charge mortgage is another mortgage that’s taken out alongside the primary mortgage. Your repayments for your primary mortgage won’t be affected. Instead, you’ll have a second mortgage with its own repayment date and amount. Nevertheless, you still risk losing your home if you fail to repay your second charge mortgage.
Your equity determines how much you are able to borrow. For example, as Loan.co.uk notes on second charge mortgages, “if you own 20% of your £300K house outright, you could be eligible to borrow up to £60K with a second charge mortgage”.
As with most forms of borrowing, the amount and interest rate depends on your circumstances, your ability to repay, and your credit history. Your home will also need to be valued so they can calculate how much equity you hold based on what it’s currently worth.
What is remortgaging?
Remortgaging simply means taking out a new mortgage on your home and using the funds to pay off an existing one. This could be with the same lender or a brand new one. Remortgaging is necessary once you come to the end of your current deal — unless you’re happy to switch to your lender’s standard variable rate (SVR). However, this usually isn’t recommended as it’s likely to be more expensive than other products on the market. Those who aren’t on any kind of fixed-rate deal can remortgage whenever they like.
The process of remortgaging is similar to securing your original mortgage. You will compare products from different lenders and once you choose the best deal for you, the loan is secured against the value of your home. This means you could be at risk of losing your property if you fail to make the repayments.
Which is best for you as a homeowner?
Second charge mortgages and remortgaging are very different, and like any financial product, the right option depends entirely on your circumstances. While it’s certainly worth consulting a mortgage broker or financial advisor, there are a few things that may help you find the best solution.
Are you getting a good deal with your current mortgage?
If you currently have a mortgage with a low interest rate, remortgaging might mean losing the good deal you’ve secured for yourself and getting a higher rate instead. This will make your monthly repayments cost more, and so a second mortgage might be a better option. It’s always worth shopping around, as some homeowners are currently being offered mortgage rates under 1%.
Are you on a fixed-rate mortgage?
You will most likely need to stick with your current lender until your deal ends if you’re on a fixed-rate mortgage. In this case, a second charge mortgage could be considered as you can arrange this separately.
Are there early exit fees on your current mortgage?
It may be possible for you to leave your current mortgage before your term ends, but you could have to pay expensive exit fees to do so. In this instance, you’ll have to see if it’s cheaper to pay the early exit fees and remortgage, or whether it’s more cost-effective to get a second charge mortgage.
Are your personal circumstances different from when you started your mortgage?
It’s probably been some time since you started your original mortgage, and perhaps circumstances have changed since then. However, if they have shifted in a way lenders perceive as negative (your credit score has dropped, you’ve missed a lot of repayments, or your household income has been reduced, for example), odds are that remortgaging will attract a higher interest rate than when you first started.
You need to weigh up whether it’s cheaper to pay higher mortgage rates on a new product, or cheaper to take out a second charge mortgage.
Are there any other ways to raise capital?
Even if remortgaging isn’t a viable option for you, a second charge mortgage may not be the best way to unlock cash. See whether there’s a cheaper way to borrow. For instance, 0% credit cards are a cheap way to borrow, if you can get the credit limit you need to cover your purchases.
However, this is only applicable to card transactions — if you withdraw cash with the card, you’ll accumulate interest at the standard variable rate and incur a withdrawal fee, which probably wouldn’t be a cheaper way to borrow.
It could even be more cost-effective to take out a personal loan, with the added bonus that you won’t be increasing the risk of losing your home if you default. A second charge mortgage may still come out on top, but make sure you explore all options before committing.
Are you meeting your current mortgage repayments comfortably?
Struggling to meet your monthly mortgage repayments is the clearest sign that a second charge mortgage is not for you. Taking on another loan on top is a bad idea as there’s a high chance you could default on at least one of them. If you’re struggling to keep up with any repayments of any kind then it’s inadvisable to take out further lines of credit. Contact your local Citizens Advice Bureau or visit their website where help and support is available on such matters.
A loan of any kind should never be taken lightly. If you’re considering remortgaging to release cash from your property or taking out a second-charge mortgage, it can be helpful to speak to a whole-of-market mortgage broker. They will assess your situation and advise on which option is the most suitable for your own unique circumstances.