Second mortgages work by securing a loan against available equity on a property, at the same time as a first charge mortgage. In recent years, the number of second mortgages in the UK has increased greatly, as a viable alternative to remortgaging. In February 2019 alone, second charge lending was up by more than 20% in the UK, emphasising the popularity of these funding options.
Whereas mortgages and traditionally utilised finance were rather rigid in terms of what borrowers could use the funds for, second mortgages have a plethora of uses including debt consolidation and home improvements (read more).
Consolidating Debts with a Mortgage
Although debt consolidation is a principle rather than a specific form of finance, lenders always prefer borrowers who have higher value assets that may be used as security on any loan. Therefore, for those already with debts including a first charge mortgage, so long as there is enough equity in the property to secure a loan against, a second charge mortgage is a truly viable option.
Using a second mortgage to consolidate outstanding debts works simply by the borrower acquiring the funds from the lender against a portion of their property’s acquired equity, then using the money to pay off all other outstanding debts. Then, the borrower and homeowner should be left with no more than their first charge and second charge mortgages to repay, rather than countless other debts.
Positively, once it is possible to remortgage the first charge mortgage without high exit fees, the borrower may then remortgage and reconsolidate, paying off the second charge mortgage with a new first charge mortgage, further consolidating their debts.
Improving your home can increase its value by potentially more than 20%, depending on the precise nature of the works carried out (source: Arthur Online Property Management). However, to have access to the necessary funds is not always easy; some improvements and renovations can cost many thousands, even tens of thousands of pounds. Hence, home improvement loans are often required.
These loans, in the context of a second mortgage work by the borrower acquiring the funds in the form of a secured loan [secured against their property] and investing that money into the works to be carried out. Once complete, a valuation of the property is likely to show an increase in value.
It is important to remember however, that the first charge lender, as the principle lender, must approve any second charge loan in any form on the property. Common improvements and renovations include loft conversions, conservatories, new central heating and ground floor extensions.
What Happens if You Default on a Second Mortgage?
As with any secured loan, should you default on the loan and be unable to make your repayments, you stand to lose the asset the loan in question is secured against. With second charge mortgages however, the first charge mortgage lender is the principle lender and this means they get precedence.
If the borrower fails to make repayments on both mortgages, it is the first charge lender who gets the proceeds of the inevitable repossession and property sale, with the second charge lender only receiving their amount thereafter. It is in part due to the order of precedence that second charge mortgages are more expensive than first charges.
Ultimately, the second charge lender must weigh up the risk of defaulting as well as the first charge lender getting priority before making their final lending decision.