Second charge loans, otherwise known as homeowner loans are a very real alternative to a remortgage. These type of loans can be a useful financial product, as they can be used for a number of various things. For example, many people choose them in the form of a home improvement loan or even to consolidate other existing debt with a debt consolidation loan. That being said, many people are unsure of how second charge loans work, or what they actually are.
Second charge loans are also often known as second mortgages. This is because they are essentially another mortgage which is below your main mortgage in terms of priority. Taking one out will essentially mean having two separate mortgages on your home, and they are often used as an alternative to re-mortgaging. This can be done whether or not the home in question is your primary residence, as long as you own it.
A mortgage is a form of homeowner loan, where the loan is secured against your property. Second charge loans are also homeowner loans, secured against any equity that you may have in your property — the part of your property which you own outright rather than that which is already used as security against your mortgage. The result is that you have two separate loans secured against your property’s value.
One reason you may wish to choose second charge loans is that, as a form of secured loan, they will offer better rates than unsecured options and open up significantly more attractive deals. This is because when deciding to give you a loan, a credit provider has to assess risk. If you are a higher-risk borrower, they will need to offset the risk with higher interest. If you offer security, on the other hand, then the risk involved is lower and lenders can offer a better deal.
This is particularly useful for those who might find it difficult to obtain a loan without security. Such groups include the self-employed or those with black marks on their credit history but whose situations have since improved enough to make the loan repayments practical.
For many people, however, the choice is between a second charge loan and re-mortgaging, rather than between second charge and unsecured loans. There are a number of reasons that a second charge loan may be preferable to re-mortgaging, but there are two key common factors.
If your credit history is not as strong as when you took out your original mortgage, re-mortgaging may land you with a worse deal. Alternatively, your current mortgage may have high early repayment charges, making a change of deal impractical.
The essence of how second charge loans work is simple: you are provided with a loan secured against the equity in your property, and you make regular repayments to pay off the loan along with all the interest you have accrued over the repayment period.
Looked at in more depth, they operate in a way that is very similar to your primary mortgage. For example, when you sell a property on which you have a mortgage, you will have to pay off that mortgage using the money from the sale. Similarly, you will also have to pay off any second charge loan that is secured against that property.
With second charge loans there will usually be no up-front fees. Another is that there is a mandatory waiting period of eight days between receiving a loan offer and signing the final copy. This gives you extra thinking time but also slows down the process.