Each borrower’s scenario will be different and there may be other factors which affect suitability and are not mentioned below. The following examples should not be regarded as advice – always speak to a loan and mortgage professional.
Examples when you might consider a second charge secured loan.
Don’t want to lose your existing deal
Let’s say your first mortgage is on a fantastic base rate tracker at 1.5% plus base. You owe £150,000 and want to raise an extra £50,000. Whilst first mortgage rates are generally lower than second charge rates, a remortgage might result in you losing your existing deal. Also the combination of your low mortgage rate and a higher loan rate may still work out cheaper than remortgaging the whole amount at an interest rate somewhere in between the two.
The timing isn’t right
Sometimes it is necessary to raise extra capital but your circumstances could result in any remortgage being expensive – potentially higher than your current rate. For example you may have recently become self employed and only have one years accounts. In a year’s time, with two years accounts, you may get a much better remortgage deal. Similarly you may have only been in your job a short time which restricts your choice of remortgage or you may have some historic credit problems which will drop off in a year or so. Rather than remortgaging and paying a higher rate on all of your borrowings, it may be mathematically cheaper to keep your existing mortgage and raise the extra with a second charge loan. Then remortgage when circumstances improve and allow you to remortgage at more competitive rates.
Many people have suffered during the credit crunch and incurred CCJ’s, IVA’s and even bankruptcies. Getting a remortgage is difficult and the rates are higher. Second charge lenders tend to be more amenable to these circumstances which allows borrowers to borrow less, settle the credit which has blighted their credit file and make it easier to return later to apply for a high street mortgage.
Higher Loan to Value borrowing
If you want to borrow against a higher percentage of the equity of your property, the lender will ordinarily charge a higher interest rate as it considers the risk higher. By remortgaging you will be increasing the interest rate on your entire borrowings. With a second charge loan, whilst the interest rate may be higher on the extra amount, it may be mathematically cheaper than paying a higher rate on all your borrowings.
Remortgage not available or greater flexibility needed
Many second charge lenders will offer greater flexibility which means accepting loans some or all first mortgage lenders won’t consider. This is partly because the loan amounts they are dealing with are smaller and partly because many lenders rely on manual underwriting and are small enough to consider individual cases. We don’t just rely on computers. We rely on people, relationships, negotiation and that’s where a good broker like Promise really comes in its own.
If your circumstances or requirements are quirky, complex or just difficult to place, a second charge mortgage could be the answer.
Some points to beware when considering second charge loans
Don’t consolidate loans for consolidations sake. Are some of the loans you plan to settle at lower rates or interest free? Are some due to finish soon? If you have sufficient income to afford these loans as well as a second charge loan it may make sense to borrow less.
Don’t over extend the term
There is often a temptation to pay the loan back over the longest possible repayment period to keep the repayments as low as possible – especially when consolidating other credit. This is fine, particularly if you need a short term reduction in outgoings and plan to settle the loan early. However, remember that the longer you keep the loan for, the longer you will be paying interest and the more interest you will pay. If you can afford it, it may make sense to borrow over a shorter term, pay less interest and pay the loan off sooner.
Adding fees to the loan
With every transactions there will be some fees which will vary dependent on the lender, product or service you are offered. You can choose to pay these all separately to the loan or, in most cases, to add them to the loan so they are deducted on completion. Most people add the fees but should be mindful that adding fees will increase the loan amount and interest will be charged on the amount of the fees too.
Why secure a loan on your home if an unsecured option is available? Unsecured loans can be a competitive option for those with a very good credit history who don’t need a large amount or want to pay the loan pay over a longer term. A remortgage or a further advance from your existing lender could also be an option to consider
2 out of 3 borrowers get a lower rate than our representative example of a regulated secured loan below:
Mortgages and Remortgages
£80,000 over 240 months at an APRC OF 4.3% and a discounted variable annual interest rate for two years of 2.12% at £408.99 per month followed by 36 payments of £475.59 and 180 payments of £509.44. The total charge for credit is £39,873 which includes a £995 broker / processing fee and £125 application fee. Total repayable £119,873.
Secured / Second Charge Loans
£63,000 over 228 months at an APRC OF 6.1% and an annual interest rate of 5.39% (Fixed for five years – variable thereafter) would be £463.09 per month, total charge for credit is £42,584.52 which includes a £2,690 broker / processing fee. Total repayable £105,584.52.
£4,000 over 36 months at an APR OF 49.9% (fixed) and an annual interest rate of 49.9% would be £216.21, total charge for credit is £3,783.56. Total repayable £7,783.56.
THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME
REPAYING YOUR DEBTS OVER A LONGER PERIOD CAN REDUCE YOUR PAYMENTS BUT COULD INCREASE THE TOTAL INTEREST YOU PAY. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY OTHER DEBT SECURED ON IT.
Written terms available on request. Loans are subject to affordability status and available to UK residents aged 18 or over. Promise Money is a trading style of Promise Solutions Ltd. Promise Solutions is a broker offering products which represent the whole of the specialist second mortgage market and is authorised and regulated by the Financial Conduct Authority – Number 681423.
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