Second-Charge Mortgage LTV ratio
Given how unpredictable the mortgage market can be, second-charge mortgages can offer a lot of people a good chance at owning the home of their dreams, especially when they can remortgage, but before you rush to get a second charge mortgage, there are some things to know.
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What Is A Second-Charge Mortgage?
The first loan that you used to buy your home is referred to as a first-charge mortgage.
A second-charge mortgage is a secured loan against your home and the equity you’ve built up. Second-charge mortgages can only be taken out if you already have a mortgage.
How Second-Charge Mortgages Work
Second-charge mortgages generally work in the same way that standard mortgages do; when you borrow a certain amount, you’ll have to repay it with interest in monthly instalments.
When you take out a second charge mortgage, your existing mortgage remains in place, thus meaning that you’ll have two mortgages on the same property. Defaulting on either mortgage will leave you at risk of losing your home.
Additionally, second-charge mortgages typically run over a period of five to 25 years.
What Can A Second-Charge Mortgage Be Used For
Homeowners effectively have free-range over what they do with the money after they take out a second charge mortgage. Here are some common examples of what people use a second-charge mortgage for:
- Paying for an event such as a wedding.
- Paying off school fees.
- Funding emergency or cosmetic surgery.
- Settling tax bills,
- Putting cash into a business to maintain or scale operations.
- Consolidating other debts, such as personal loans or credit card debt into one monthly payment.
- Financing large-scale home improvements.
Should You Get A Second-Charge Mortgage?
The pros and cons of a second-charge mortgage and whether you should get one depending on your individual situation.
For example, a second-charge mortgage may suit you if you have a poor credit rating, your current mortgage interest rate is low, and you don’t want to remortgage, or if you’re borrowing money to increase the value of your home.
You do need to remember that it’s a loan secured against your equity. Here are some benefits and downsides of taking out a second charge mortgage. You can use a second-charge mortgage broker to get the best rates via Loan Corp today and get approved in just 24 hours.
Pros
- Has longer terms than an unsecured loan, up to 25 years.
- Greater chance of being approved, even with bad credit.
- Allows you to keep a low-interest rate on your mortgage.
- Are cheaper than unsecured borrowing or an unsecured personal loan.
Cons
- Having two mortgages on one property.
- The longer repayment term means you’ll be paying more interest in the end.
- Loans secured against your property mean that you could lose it if you don’t keep up with the payments.
- Requires an assessment of personal spending habits if being used for debt consolidation.
Borrowing Potential On A Second-Charge Mortgage
You can typically borrow anything between £1,000 and six figures, but how much you can actually borrow will depend on how much you earn and how much equity you have in your home.
Equity refers to the percentage of your property owned outright by a homeowner. So, it’s the difference between the value of your property and the outstanding balance on your first-charge mortgage.
Many of the second-charge mortgage lenders out there have a maximum loan-to-value (LTV) for a property’s combined first and second-charge mortgages.
LTV Ratio On A Second-Charge Mortgage
Lenders will always have different criteria when it comes to calculating an LTV ratio that they’d be willing to accept, as well as how much they’re willing to lend, particularly on a second-charge mortgage. Overall, equity is the most important factor that a lender will consider.
75% LTVs are generally the most common when it comes to second-charge mortgages. However, some are willing to go up to 100%. Bear in mind that not every second charge lender will calculate the LTV on the basis of your current mortgage.
What Affects The LTV Rate On A Second-Charge Mortgage
The number of variables associated with the LTV rate on a second-charge mortgage can make it very difficult to predict exactly how much you’ll be able to borrow, particularly if you don’t have access to the rates of various lenders. This is why using a mortgage broker can make your life much easier.
Equity
As you may know by now, equity is one of the main factors that affect LTV on a second-charge mortgage. Generally, the more equity you have, the more your can borrow. This is because your property can be repossessed in the event of you failing to make the payments and your equity used to settle the debt.
Type of property
The location of your property and surrounding risks is another significant factor that can impact your LTV rate, as you’re looking at a mortgage secured against your property. In the event of a customer failing to make payments, both your first lender and second charge lender will want to ensure they can recover the money they loaned.
Credit history
If you have a bad credit history, then it’s highly unlikely that you’ll be offered a favourable LTV rate on your second charge mortgage. Luckily, it’s generally easier to get a second-charge mortgage, even if your credit isn’t the best out there; however, your bad credit won’t help when it comes to the LTV rate.
Your age
Much like with standard mortgages, lenders will have maximum age caps or age classifications. This is because people are seen to present different risks at different ages, and mortgage lenders are known to do as much as possible to mitigate risk.
How To Get A Good LTV Rate On A Second-Charge Mortgage
It’s no secret that working with a mortgage broker is the best way to get a mortgage arrangement that you’re comfortable with. This is because mortgage brokers generally understand the needs of their clients and that situations are rarely the same.
Additionally, some lenders simply don’t have enough experience to deduce whether or not they can lend to someone, thus resulting in lower LTV ratios and higher interest rates.
Brokers have an extensive network which they can use to connect you to the right lenders, thus saving you time and money.
Should You Take Out A Second-Charge Mortgage Or Remortgage?
Remortgaging and taking out a second-charge mortgage both have their upsides and downsides, so choosing one will again depend on your personal circumstances and which terms will suit you better in the long run.
If the interest rate on your mortgage is low or favourable, then you probably won’t want that to change. In this case, taking out a second-charge mortgage could keep your interest rate low and help you borrow more money.
If you want to remortgage before the end of a fixed rate, you may also have to pay an early repayment charge on your existing mortgage. Early repayment charges tend to be quite expensive, despite gradually reducing with each year of the deal.
Remortgaging may be better than taking out a second mortgage if you can remortgage to a cheaper rate. This will also mean having a single loan secured against your property. Besides second mortgages and remortgaging, getting a further advance is another viable option, but it will more than likely come with a higher interest rate.
How To Get A Second-Charge Mortgage
Getting a second-charge mortgage is very similar to getting a standard mortgage and will involve you going through either the actual lender, a mortgage broker, or an intermediary. Regardless of the route you pick, an adviser will carry out an extensive assessment of your financial situation to determine which financial product will best suit your needs.
Generally, when you apply, a lender will run a credit check, perform a property valuation, and will request proof of income.
Going directly to a lender is generally not recommended as there many seemingly minute criteria on the basis of which your application may be rejected. Mortgage brokers have extensive knowledge and can thus circumnavigate such.
Let Loan Corp Guide You Through Second-Charge Mortgages
At Loan Corp, we have a wealth of mortgage industry knowledge and thus know exactly what a second-charge mortgage lender will be on the lookout for. In addition to this, we know all the ins and outs and have strong relations with specialist lenders so that we can get your application right the first time.
If you’re ready to find the best second-charge mortgage loan-to-value ratios and to make your own life easier, then get in touch with our team of experts through our online form or give us a call at 0808 301 9509.
FAQs
Are second-charge mortgages regulated?
Since 2016, second-charge mortgages and secured loans have been overseen by the Financial Conduct Authority. This means that financial services providers are obligated to act in the best interests of the consumer, so they cannot mislead you or sell you products that you cannot afford.
Is a second-charge mortgage the same as a secured loan?
A second-charge mortgage and a secured loan are indeed the same things, and the terms are often used interchangeably. You can also expect a second-charge mortgage to be referred to as a home equity loan, homeowner loan., or second mortgage.
What happens if I can’t make the payments on a second charge mortgage?
Because second-charge mortgages are secured loans, your home could be at risk of repossession if you fail to keep up with the payments.
When a house is repossessed, the money from the sale is distributed among the secured lenders in the order the loans were issued. This means the first charge mortgage balance will be paid first, after which the second charge lender will be paid.
Second-charge lenders are less likely to be paid in the event of there being a shortfall. This risk factor is why second-charge mortgages are more expensive than standard ones.
Which lenders offer second-charge mortgages?
Although they’re usually sold through brokers, second-charge mortgages are usually only offered by specialist lenders. Some examples of specialist lenders include Pepper Money, Paragon Bank, Shawbrook Bank, and Norton Finance.
Applying for any type of mortgage can be a complex undertaking, so it’s advisable that you enlist the help of a mortgage to avoid these complications.
Is it easy to get a second-charge mortgage?
A lot of people with bad credit tend to gravitate towards second-charge mortgages as an option, as even people with a bad credit rating have a fair chance of being approved. The same applies to people who are self-employed or have a fluctuating income.
Final Thoughts
Upon reading through this article, you may believe that a second-charge mortgage is a viable solution for your situation. While that may be true, it’s important to remember the implications of getting one and to run an assessment to determine if it would truly be for you.
Before you take out a second charge loan, talk to your current mortgage lender to see what they’d charge for an additional loan. You can also look into either remortgaging or a further advance. Regardless of the option you pick, it’s always advisable to let a mortgage broker look into your situation and provide you with a bespoke solution; Loan Corp can do this for you so contact us now.