What Are Second Mortgages?
Sometimes known as “secured loans” or “home equity loans”, second mortgages are mortgage loans that are secured on a property which already has a first mortgage on it.
For example, if your home is worth £150,000 and you owe £80,000 on your existing [first] mortgage, you would be eligible to take a second mortgage based on the equity in your home – the difference between its value and what you owe on your mortgage.
Why Would I Want A Second Mortgage?
Second mortgages are ideal for a range of purposes:
• Buying a second home
• Funding a business startup
• Renovating or extending your existing home
• Consolidating your existing debts in a single, cheaper loan
Be careful, though – second mortgages are seen as higher risk by lenders, and consequently usually have higher rates of interest than first mortgages.
In some circumstances – depending on what you want the money for – it can be cheaper toremortgage than to take a second mortgage. That way, you retain the benefit of the lower interest rates available on first mortgages, saving you money on interest payments in the long term.
If you are not sure whether remortgaging or a second mortgage is best for you, take a look at our section on remortgaging for more information.
You might also want to consider getting in touch with an independent mortgage adviser who will be able to explain your options and show you the best deals available.
How Do Second Mortgages Work?
Second mortgages are pretty similar to first mortgages, but with a few added complications.
First of all, you can’t keep it a secret. When you apply for a second mortgage on a property, you have to tell your first mortgage lender about the second mortgage – and both lenders have to agree to the deal.
The reason for this is risk. Second mortgages are second in line when it comes to debt collection. In a worse case scenario if your home is repossessed and does not sell for enough to cover both mortgages, the law means that the first mortgage lender will get their money first – leaving the second mortgage lender out of pocket.
That’s why interest rates are higher on second mortgages – there is more risk for the lender.
Of course, when you apply for a second mortgage your lender will value your home to make sure that it is worth enough to pay off both your first and second mortgages – but even then, things can go wrong:
• You could become unable to pay your mortgages – through sickness or unemployment
• The value of your property could fall, so that even if you sold it you would not be able to pay off both of your mortgages
Even if you are keeping up payments on your first mortgage, your home could still be repossessed if you do not keep up payments on your second mortgage as well. This makes it important not to stretch yourself too much when considering a second mortgage, however tempting it seems when times are good.