First Charge

When you enter in to a mortgage contract, the lender will place what is known as a ‘charge’ on the mortgaged property. This ensures that, should you not keep up with your repayments, the property can be sold and the lender has a legal right to get their money back before any other creditors.

It is this ‘security’ that gives the lenders the confidence to provide loans to borrowers. This is the reason why mortgage rates will generally be much lower than personal loan rates, whereby no ‘security’ is taken.

Second Charge

There are lenders who will provide further loans to homeowners, at relatively competitive rates, as they will place a ‘second charge’ on the mortgaged property.

A second charge works in exactly the same way as a first charge, but the lender with the second charge has to allow the first charge lender to get paid first, before reclaiming their loan in the event of repossession. The risk, therefore, is increased for second charge lenders and this is reflected in the higher interest rates offered by them, as compared to mainstream first charge lenders.

Why A Second Charge Loan?

So, why apply for a second charge loan (sometimes called Homeowner Loans) when the rate of interest is likely to be higher than with a conventional mortgage? There could be many reasons for this and cases that we have previously dealt with include:

A client on a very good 5-year fixed rate deal wanting to borrow more money without having to break his existing deal and pay high Early Repayment Charges.

A client wanting to borrow more against his investment property but being restricted by the new PRA rules. The rules do not apply to many second charge lenders, who are private companies.

A client wanting to borrow further funds against his property, but his existing lender refusing further lending. Second charge lenders will often use higher income multiples when deciding on the total maximum borrowing a client can have.