You may have heard people talk about second-charge mortgages and wondered what they are. If you’re a landlord, they can be a beneficial way of accessing a lump sum of money. Here’s our Q&A guide to second-charge mortgages for owners of buy-to-let properties.
Q. What is a second-charge mortgage?
A. A second-charge mortgage is a loan of money from a bank or building society. You may also hear second-charge mortgages referred to as a ‘secured home loan’. Unlike a conventional mortgage, when the borrower has to prove a minimum income level, a second-charge mortgage is based on how much equity is in the property. Therefore, only homeowners with some equity can access this type of loan.
A second-charge mortgage is a completely different product to a main mortgage. You will see two different payments come out of your bank account and the second-charge mortgage may have a different rate to your main home loan. Although second-charge mortgage rates are usually higher than the one attached to your first mortgage, it is often lower than personal loans and credit card rates. Both mortgages will need repaying when the property is sold.
Q. How much will a lender loan me?
A. The loan amount will be based on how much equity is in the property. The more equity there is, the higher the loan amount will be. As a rule of thumb, second-charge mortgages can be arranged for up to 75% of the equity amount.
Equity in a property – also known as capital - is the difference between how much the home is worth if it were sold, versus how much is left to repay on the mortgage. For example, if the property is valued at £300,000 and the remaining balance of the mortgage is £100,000, the equity would be £200,000. A lender may grant a second-mortgage up to the value £150,000, although lending will be on a case-by-case basis.
Q. Why might a landlord need a second-charge mortgage?
A. One popular reason for landlords taking out a second-charge mortgage is to access equity without having to remortgage. It’s likely a lump sum will be available without early repayment penalties, and the borrower can keep their first mortgage on their existing (and potentially preferential) rate.
There can be additional reasons for landlords to access their equity. Legislation – both existing and incoming – dictates minimum habitable standards in buy-to-let properties and meeting these benchmarks can involve costly home improvements.
The money released by a second-charge mortgage can cover a new kitchen or bathroom, or it can be used to pay for energy-efficient retrofitting, such as air source heat pumps and solar panels. These will become critical as the private rental sector works towards a revised minimum EPC rating of C for all buy-to-let properties.
Landlords can also use the money to grow their portfolio, using their equity to put a deposit down on another buy-to-let purchase. The money can also be used to consolidate debt elsewhere.
Q. What happens if I don’t keep up with repayments?
A. A second-charge mortgage is secured against the property. Just like the original mortgage, if you fail to keep up with repayments, you could damage your credit score and risk your home being repossessed.
Q. How can a landlord arrange a second charge mortgage?
A. Firstly, the borrower will need permission from their main mortgage lender to take out a second-charge mortgage. The second-charge mortgage market is its own entity, with different lenders vying for business. It may be possible to take out a second-charge mortgage with the current lender, or there may be better rates available elsewhere. We strongly recommend you consult with a mortgage broker or financial adviser if you’re interested in additional borrowing.
If you’re hoping a second-charge mortgage will allow you to purchase another buy-to-let, get in touch. We can supply a list of available properties that match your deposit amount and borrowing circumstances.
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