Unlike in the past, getting credit, these days isn’t always easy because many banks and financial institutions have tightened their lending policies. If you are a homeowner, however, there are many options that you can resort to if you need to borrow. One of the most common options is the so-called Second Charge Mortgage, which is secured against the value of your property. This means that you must own a home or hold a mortgage on the property.
So what is the difference between this option and conventional re-mortgaging?
Second Charge Mortgage
A second charge mortgage is a loan that’s secured to your home or property. Like other secured loans, in case you stop making the agreed repayments, the lender is authorized to repossess your property to pay off the amount you owe. It is, therefore, advisable to be certain of your repayment capabilities before you opt for this type of loan.
On the plus side, nonetheless, considering that the loan is secured to your property, you can borrow more than is possible with a normal personal loan. Additionally, you can make your repayments more affordable by spreading or extending the repayment period.
Generally, the amount that you can borrow with this type of mortgage is often determined, in part, by the value of equity in your home. It is also important to note that once you take a second charge mortgage, the payments that you will make are totally different from your mortgage payments, and priority is given to you mortgage.
Re-mortgaging is taking another mortgage with the same value as your current mortgage and/plus the extra amount you are looking to borrow. Put simply, instead of having two products (a mortgage and a loan), you extend one mortgage to give you the extra amount of money that you need.
There are certain important aspects that you need to note when you decide to go the re-mortgaging way. First off, if you decide to pay your mortgage early, you are likely to incur a repayment fee, which can sometimes be quite high depending on your lender’s terms.
Again, you will have to let go your current mortgage deal, which means that if the current terms are very easy and favourable, you might need to think hard before opting for re-mortgaging. Nonetheless, it can also swing the other way: you may land a better deal, so the bottom line is to take your time before making any commitment. Lastly, it is advisable to be meticulous with the terms that your lender is offering when it comes to early repayment fees.
While it may seem to be favourable form of borrowing on the surface, it can get quite expensive if you are to pay a larger early settlement fees.
When Should You opt For A Second Charge Mortgage?
By and large, both re-mortgaging and second charge mortgage are secured against your property, so either way your property is at risk if you fail to make your repayments.
If you opt for a second charge mortgage deal, however, it will always be considered as a second priority to your initial mortgage. This means that if you ever find yourself struggling to repay, you initial mortgage deal will take priority. What’s more, you won’t need to change the current mortgage, meaning there is no need to worry about early redemption penalties.
As aforementioned, if you opt to re-mortgage, you will have to cater for early repayment fees, and there is no guarantee that you will get a better interest rate than what you are currently getting. This simply means that you will be at risk of having to pay more.
Again, if you currently have a worse credit rating than when you initially took your main mortgage, re-mortgaging will attract more interest on your overall mortgage as opposed to the extra amount that you want to borrow.
Whether you opt for a second charge mortgage or a re-mortgage, you are at risk of losing your home should you fail to make repayments. Before taking any loan (both secure and unsecured loans), therefore, it is highly recommended to seek advice from financial experts or professional mortgage advisers or firms. Most of them will first assess your individual situation and give you a bespoke advice based on your financial needs.