CHARGING ON INTO A SECOND MORTGAGE?
I nterest rates are at all-time lows – with some mortgages hovering around one per cent. But some credit cards, high street store loans and other sources of credit remain high.
So it can be tempting to look at any increased value of your home and cash in on that – especially as rates are a fraction of credit card and store loans.
You can opt to remortgage – start all over again.
But that can involve charges and hassles. An alternative is the “second charge mortgage”.
These second mortgages have their uses but can have drawbacks. Before signing up, both consider the terms – and other choices.
Second charge mortgages legally have secondary priority behind your main (or first charge) mortgage. But you can’t treat these loans more lightly – a second charge lender can apply for repossession, so you could lose your home if you fall behind even if you are up to date on your first loan.
Many borrowers use them to fund home improvements, or sometimes to pay off debts or even settle tax bills for which many lenders often refuse cash. Second charges start at around £5,000.
The alternative can be to cash in on any increased value of your property with a remortgage.
This is where you start again with a fresh loan.
Remortgages can include early repayment charges if you have a fixed rate and, if the new loan is a high proportion of the value, you might pay increased interest charges.
Brokers make affordability checks before you sign a second mortgage but lenders are really interested in the value of your property rather than your employment status or credit rating.
Like all loans, you need to enter into them with your eyes open.
You need to be aware of the possible pitfalls.
David Blake at Which? Mortgage Advisers warns: “Although the market is growing, you have less choice with second charge products compared to standard mortgages.
You also need to consider the impact of any future interest rate rises on your ability to repay both your existing mortgage and the new second mortgage.”
Second mortgages are more expensive – typically starting around 4 per cent – and can come with fees. In some cases, it is cheaper to remortgage, especially if you want to borrow a substantial sum.
TOP TIPS FOR REMORTGAGES
1. You will have to show the lender that you can repay – and could continue to repay if interest rates rose.
2. Always take advice before you sign anything.
3. You can set up a second mortgage with an end date to coincide with your fixed rate first mortgage.
4. If you sell your home, the first mortgage is paid off to start with. If you can’t pay the second loan, then the lender can pursue you through the courts. And that would also make it more difficult for you to get a new mortgage in the future.
5. Always look at other options. It might be cheaper to take the early repayment charge hit and remortgage – especially if you qualify for the current low rates.
6. Consider unsecured loans which would not cause your home to be repossessed if you default.
Consider all the choices before going ahead with a second charge mortgage
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