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Mortgage Decisions: First Charge vs Second Charge Mortgage Products

Uncover all the important comparisons between first and second charge mortgage products to help you make informed financial decisions.

Almas Uddin
Almas Uddin

Founder and Mortgage Advisor

Almas Uddin2024-07-17
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The Difference Between First And Second Charge Mortgage Products

Understanding the difference between first charge vs second charge mortgage products is important, whether you're considering taking out a second loan or wish to work out whether you should go for a second charge mortgage or remortgage option.

The primary contrast is that a first charge mortgage is an initial loan secured against a property, whereas second charge mortgage loans are additional and separate, taken out before you have repaid the first.

Homeowners can apply for second charge mortgage loans if they have sufficient equity in the property and do not wish to opt for a remortgage – perhaps because the first mortgage is locked into a fixed term, and the second charge mortgage fees are substantially lower than the early repayment charge.

Let’s look at first charge vs second charge mortgage options in a little more detail to showcase the variances and why risk is a primary factor when a lender assesses your eligibility for second charge mortgage loans.

How Are a First Charge vs Second Charge Mortgage Different?

The most common approach, if you need additional borrowing or want to reduce the costs of your first charge mortgage, is to remortgage. However, there are many scenarios where this isn't possible or viable.

Second charge mortgage loans are not directly connected to the first mortgage and can be held with a completely separate lender, in effect usually meaning you're paying two mortgage repayments each month, one against each product.

If you need to compare second charge mortgage products to first charge loans, you’ll necessarily notice that second charge mortgage fees and interest rates are higher. That is because, should the property be repossessed, the first charge mortgage has priority for repayment, whereas second charge mortgage loans are the second security.

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Equity and Second Charge Mortgages Explained

Equity is fundamental to applying for second charge mortgage loans because you need to have enough equity in your property to secure the second lending amount. Your equity is the proportion of your home without any debt secured against it.

For example, if you have a home worth £500,000 and have a first mortgage balance of £200,000, you could use the £300,000 equity as security to apply for second charge mortgage loans.

Lenders calculate your equity and will base the maximum lending available on second charge mortgage loans on a percentage called the LTV, or Loan to Value. Most providers will lend up to around 80% or perhaps 85% on second charge mortgage loans, which means the most you'll typically be able to borrow is 80 to 85% of your equity.

So why is a second mortgage more expensive if it is secured against your equity? The reality is that a repossessed property is normally sold for less than market value – and homes can depreciate as well as appreciate.

Therefore, regulated second charge mortgage lenders won’t lend up to 100% of the equity and charge higher second charge mortgage fees to protect against the risk that they make a loss if you cannot repay the debt in full.

Reasons to Consider Second Charge Mortgage Loans

As we’ve noted, homeowners apply for second charge mortgage loans for myriad reasons. Still, it is important to work with an experienced broker if you need help deciding whether to opt for a second charge mortgage or remortgage to evaluate all the costs and expenses.

The positive is that most second charge mortgage loans are fairly open to any uses you have in mind, so you might decide to compare second charge mortgage products for the following financing requirements.

  • Debt consolidation: if you have multiple debts, you can borrow against your equity through second charge mortgage loans to repay your creditors, and usually reduce the costs associated with repayments.
  • Extending or improving your home: second charge mortgage loans are often used to finance home improvement works such as installing a new kitchen, converting your attic, or adding an extension to increase the size and value of the property.
  • Large-ticket purchases: you could opt for second charge mortgage loans to cover the costs of paying for a holiday, covering a child’s education cost, financing medical treatments or purchasing a car, as a few examples. Although second charge mortgage fees are higher than first charge lending, the interest rates may also be lower than those available through alternative short-term loan products.

Some lenders will ask about the purpose of your second charge mortgage loans, whereas others will be more focused on property valuations and your creditworthiness to make a lending decision.

Second Charge Mortgage Pros and Cons

Every borrowing product has pros and cons, and it’s essential you compare second charge mortgage products and lenders before making any long-term financial decisions, particularly if you have the option of deciding between a remortgage on a first charge vs a second charge mortgage application.

One of the most obvious downsides is that second charge mortgage loans are more expensive than first charge mortgages, and the larger the total debt, the longer it will take to repay and the higher your mortgage costs will be each month.

It is also vital to appreciate that non-payment of second charge mortgage loans puts your property at risk in the same way as any other mortgage.

However, you may not be able or willing to consider a remortgage because:

  • Your first mortgage lender will not lend anything further to you or cannot offer competitive interest rates, making second charge mortgage fees a better option.
  • You are tied into a fixed rate, and deciding on a second charge mortgage or remortgage involves factoring in steep early exit penalty charges.
  • You do not wish to apply to your first charge mortgage lender, either because you are not keen on any of the products they have available or you would prefer to borrow from a different provider offering second charge mortgage loans.

The advantage of second charge mortgage loans is that, because the product is secured against your equity, you can normally borrow as much as you require, provided it fits within the maximum LTV applied by most lenders.

Although second charge mortgage fees are higher than for first charge mortgages, they may also be lower than other products such as personal loans or credit card financing.

Alternatives to Second Charge Mortgage Loans

We always advise any prospective applicants considering second charge mortgage loans to contact our experienced advisers at Revolution to ensure they have a full understanding of the second charge mortgage fees and other potential solutions.

You might consider remortgaging, a secured personal loan or a home equity loan, and the right adviser will help you compare second charge mortgage costs with other financing to make informed, knowledgeable judgements.

Please get in touch with Revolution Finance Brokers at any time if you'd like more information about first charge vs second charge mortgage products or to discuss your circumstances to identify the best way forward.

Almas Uddin
Almas Uddin

Founder and Mortgage Advisor

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The content included in our articles, blogs, web pages and news publications is based on information accurate at the time of writing. Note that policies and criteria can change regularly throughout the UK mortgage lending market, and it remains essential to contact the consultation team to receive up to date guidance. The information included on the Revolution Brokers site is not bespoke to any circumstances or individual application scenarios and therefore is not intended to be used as financial advice. The content we share is designed to be informative and helpful but cannot be relied upon to provide individual advice relevant to your mortgage requirements. All Revolution team members are fully qualified, trained and experienced to provide mortgage advice of an independent nature.

We collaborate with lenders and providers who are regulated, authorised and registered with the Financial Conduct Authority (FCA). Should you require specific mortgage borrowing types, some products such as buy to let mortgages may not be FCA regulated. The Revolution team can provide further information about regulated and unregulated lending as required. Please remember that a mortgage is a debt which is secured against your home or property. Your home can be at risk of repossession if you do not keep up with the repayments or encounter any other difficulties in managing your mortgage borrowing responsibly. This also applies to any remortgage or home loan secured against your property, including equity release products.

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