A Guide on Secured loans (Second Charge Mortgages)

A secured personal loan is also known as a second charge mortgage. It lets you borrow a lump sum of money which is secured against a property.

The property is secured by the lender through a ‘second charge’, which ranks after your main mortgage (which is held on a ‘first charge’ basis). This is a legal arrangement that is registered with the Land Registry.

You can use the money for whatever purpose you want (provided that it is not illegal or for commercial gain). However, second charge mortgages are usually used to fund large purchases (such as purchasing a new car), home improvements, or to consolidate existing debts.

Throughout the term of the loan, regular monthly repayments must be made. The term of the loan can usually be between five and 25 years.

The Financial Conduct Authority (FCA) have been regulating the selling and administration of first charge loans for quite some time. The FCA now also regulates second charge loans. Second charge loans are subject to exactly the same rules as regular mortgages.  This implies that you will need to be able to prove that you can afford to repay both the first mortgage and the second mortgages, with some room to spare.

Who is a secured second charge mortgage suitable for?

Secured loans are for those borrowers with an existing mortgage who want to borrow larger amounts of money than what standard personal loans can offer, usually a maximum of £250,000. Borrowers tend to have established equity in their homes that they can utilise as security against the loan.

What should I look for when taking out a second charge mortgage?

There are some catches and things that you need to understand before you commit yourself to this kind of secured loan, including:

  • The ‘second charge’ on your property signifies that if you default on a secured loan, the lender can eventually take you to court and order the repossession of your property. The first charge lender gets to be paid back first, and the second charge lender receives what is left, up to the outstanding debt’s value.
  • Interest rates of second charge mortgages are usually variable, which means that it is difficult to budget as the rate could increase or decrease. If you also have a  variable rate mortgage,  you might be affected twice if rates rise, so make sure that you can afford it.
  • Consolidating debt is usually seen as the last resort of homeowners. However, it can be a great way to get you out of a hole in the short term. Remember, if you opt for lower monthly repayments in return for a longer loan period, you will end up paying more in the long term.