Mortgage: Should you look into ‘second mortgages’ as new business volumes drop by 71%?

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Mortgage holders appear to remain cautious as the economy reopens according to new data released from the Finance and Leasing Association (FLA). The organisation found that second charge mortgage new business volumes fell by 71 percent in June 2020 when compared to the same period the year before.

Geraldine Kilkelly, the Head of Research and Chief Economist at the FLA, commented on their findings: “The relatively slow recovery in second charge mortgage new business volumes reflects the gradual re-opening of the economy and continued household caution as the outlook for employment and the progression of the virus remains uncertain.

“Lenders are continuing to do all they can to support customers during this challenging period and customers experiencing payment difficulties should contact their lender as soon as possible.”

According to the Money Advice Service, second charge mortgages can only be offered to people who are homeowners but they do not necessarily have to need to live in the property.

A second charge mortgage can be a loan of anything from £1,000 upwards.

Applying for these loans should be considered carefully as just as is the case with regular mortgages, failure to repay the debt could mean that the holder may lose their home.

The equity held on a home will be used as security against this loan and this will mean that the person involved will have two mortgages on the property.

Lenders will have to perform affordability checks and stress tests on the borrower before they provide the loan, meaning that those with poor credit records may not have their applications granted.

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There are many reasons why a second charge mortgage may be worth considering, with the following being common examples:

  • If mortgage holders are struggling to get some form of unsecured borrowing, such as a personal loan, perhaps because they’re self-employed
  • If a mortgage holder’s credit rating has gone down since taking out the first mortgage, remortgaging could mean they end up paying more interest on the entire mortgage. A second mortgage means extra interest is just on the new amount they want to borrow
  • If the mortgage has a high early repayment charge, it might be cheaper for the holder to take out a second charge mortgage rather than to remortgage.

If the holder goes on to sell their home, they will need to pay off the second charge mortgage or transfer it to a new mortgage.

People who are only just managing to repay their initial mortgage may not find a second mortgage to be an appropriate option, with the FLA highlighting that hundreds of people have their properties repossessed every year by second charge lenders.

Some people may consider using a second charge mortgage to pay off smaller debts (such as credit card bills) through consolidation planning but this could be expensive in the long term.

Second charge mortgages can run for up to 25 years, meaning that more interest could be accrued over time.

If a person does want to take out a second charge mortgage there are a number of things they should look into before moving forward.

Mortgage holders should:

  • approach their existing lender and ask them what they would charge for an additional loan
  • shop around – ensuring that they make sure they get the best rate by comparing lenders’ APRC (annual percentage rate of charge), the duration of the loan and the total amount they’d have to pay back
  • Find out the exact mortgage terms, fees, early repayment charges and rates of interest.

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