In 2017, over £92 million worth of second mortgages were purchased by Brits in just one month. Second mortgages are proving a more and more popular option with people who want to borrow money for home improvement, family planning or other home-related financial expenditures. Even though this is the case, there are still many people who aren’t sure what a second mortgage actually is, how to go about getting one or what the benefits and drawbacks of a second mortgage might be.
If that’s you, don’t worry: you’re not alone. Fortunately, a second mortgage is nowhere near as scary or difficult as it might appear. The concept behind a second mortgage is exactly as it sounds: another mortgage on a property that is already mortgaged. Let’s say, for example, that you want to start a family, and so you want to build a nursery for your new baby. Your property has £75,000 left to pay on the mortgage, and you will need £10,000 for the nursery (for the sake of argument). You would then take out a second mortgage for £10,000. Simple, right? You can get started with these second mortgage loans right now if you’re already sold.
So, what do you need in order to take out a second mortgage? Well, the good news here is that there really aren’t too many prerequisites. First, you need to own a home, which is a bit of a no-brainer. You don’t need to actually live there, just to own the building. Next, the second mortgage lender will carry out an affordability check, which is basically a look at your financial comings and goings to ensure you have enough money to pay the second mortgage back.
Finally, you need to have equity on your property. Equity is simply the difference between how much your property is worth right now and what’s left on the mortgage. For example, if your property is currently worth £200,000, but you have £100,000 left to pay on your original mortgage having made some payments, then you have £100,000 equity in your house, which is its current market value minus the mortgage payments you have outstanding.
There are several reasons you might want to take out a second mortgage. First, and most obviously, it gives you a little extra money to play with for any home improvement projects you might have planned. This is the most clear benefit to a second mortgage, and it’s also the reason most people decide to get one. There are other options if this is your goal, though, so what makes a second mortgage more desirable than, say, remortgaging your property?
Well, remortgaging can sometimes have unexpected costs for you. Many mortgage lenders impose early repayment fees on remortgaging, which can lead to you being out of pocket; let’s take the early example again and say you want to remortgage for £85,000 (£75,000 plus the £10,000 for the nursery). If your mortgage lender slaps a £10,000 early repayment fee on your mortgage, then you’re out of pocket, and there’s no guarantee you’ll get a better interest rate on your new mortgage, so you might well be falling for a bum deal.
A second mortgage doesn’t have this problem, as it’s with a separate provider, so there will be no early repayment fees. Interest rates may well be higher on your second mortgage, and there are always fees associated with setting one up; however, this will almost certainly be a lower cost than remortgaging, so in the long run you’re benefiting much more from a second mortgage than you would from remortgaging your property.
There are many other circumstances in which a second mortgage might be desirable. Unsecured personal loans can be difficult for people with poor credit ratings or self-employed people, for example, and a second mortgage is a great way to remedy this problem. There are drawbacks to consider, though, which you should thoroughly give thought to before you go ahead.
If you’re currently having trouble repaying your first mortgage, then a second mortgage isn’t the way for you to go. It may seem attractive to have a short-term injection of cash to help you pay the first mortgage, but the second lender will still expect you to keep up repayments, and if you can’t, then the same penalties will apply but twofold as you can’t pay back either mortgage. Second mortgages are secured against your home, so you may be in danger of having your property repossessed if you can’t make your payments.
Second mortgages aren’t anywhere near all doom and gloom, though. For the vast majority of people, they’re a great way to help with that home improvement project or getting a family started. As with any financial endeavour, make sure you’re set up and safe before you get started and things can only get better.