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Second charge on your home

Oct 01, 2018
Second charge on your home

Key Takeaways

1. What is a Second-Charge Mortgage?

  • A second-charge mortgage is a secured loan that uses the equity in your home as collateral.
  • It’s separate from your original mortgage and allows you to borrow additional funds without remortgaging.
 
2. Eligibility:
  • Only homeowners can take out second-charge mortgages.
  • You’ll need equity in the property to qualify.
 
3. Permission from Existing Lender:
  • Obtain permission from your current mortgage lender.
  • Prove affordability for both loans.
 
4. Costs and Risks:
  • Consider early repayment charges and penalties.
  • Remember that your home could be repossessed if you can’t pay either mortgage.

When you purchase a property through the Help to Buy Equity Loan scheme you will take out two secured loans against your new home. These are termed first and second charges . Your mortgage is the first charge, and the Help to Buy Equity Loan is the second charge.

 

What is the difference between the first and second charge?

The first thing to note is when you take out a secured loan, it is done so against the value of your property. Hence the term secured. First charge; A mortgage is a secured loan but is termed a first-charge in the instance that you default and any debt has to be recovered, the first charge is paid off  first. This is always the case whenever you purchase somewhere with a mortgage.
 
Second charge; The Equity Loan is deemed to be the second charge, in the event of default the second charge is paid off after the first charge. Therefore, in this scenario, the mortgage will always be cleared before the equity loan. As is the case with your mortgage, your property can’t be sold in the future without the Equity Loan being paid back. Either prior to or at the time of sale.

Do I have to agree to this charge being secured on my home?

When purchasing through the Help to Buy Equity Loan scheme you must agree to the charge being secured on your home as a condition of the purchase.
 

How much do I need to pay back when I sell the property?

When it comes to paying back the loan at the time of selling, the value will be calculated as 20% (or 40% in London, 15% in Scotland) of the sale price. If you choose to pay back the loan before you come to sell, it will be as a percentage of the future value. If you sell your house or have lived there for over 25 years you will have to repay the equity loan amount back in full if you haven’t already done so. The Help to Buy equity loan is interest free for the first five years, after which you will be charged a rate of 1.75%. This rate steadily increases year on year in line with any rise in the Retail Price Index plus 1%. These repayments will be on top of your mortgage repayments.
 
This guide was produced in collaboration with L&C Mortgages, the UK’s largest fee free mortgage broker and adviser.

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