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.

Can you Afford a Mortgage?

Before buying a home, examine whether you can afford the cost of a mortgage. Here is a guide on how to check if lenders will accept your application and if you can be able to keep up with the repayments.

Check if you can afford a mortgage

To work out the amount you can afford to spend for a home, you need to consider:

  • Your outgoings
  • Your total income

Deduct your outgoings from your income to determine how much you can pay for a mortgage every month. You can then dodge getting one with repayments that you cannot afford.

You can determine how much you can spend on a home with the use of a mortgage cost calculator. Just type in the mortgage amount, interest rate, and the mortgage term to check how much repayments will cost.

Verify if you can afford the mortgage by comparing the calculated amount to how much you can afford to pay every month.

 

Will lenders accept your mortgage application?

Lenders have to carefully review your financial circumstances before they can grant you a mortgage. The rules of the Financial Conduct Authority’s (FCA)  means they have to ensure that you can keep up with the repayments.

To determine how much you can afford to repay, they will have to look at:

  • If you are in permanent full-time employment
  • How much you earn
  • Your outgoings and the things that you spend your money on
  • If you have people that financially dependent on you, i.e. children
  • Your outstanding debts

Lenders will also base their judgment on:

  • Your credit history: This informs lenders how much your outstanding loans are and how well you have handled debt in the past.
  • Your age: If you are close to the retirement age, you may only be offered shorter-term mortgages, and you normally need a larger deposit. (See: How to Obtain a Mortgage if You Are an Older Borrower)
  • Your deposits: The more you can place down as a deposit, the lower the risk for the lender. Putting down a large deposit will give you more chances of being accepted, and you should also be able to be offered with a lower interest rate.
  • The value of the property: The size of the mortgage you need will have an effect on whether lenders think you can afford to keep up with the repayments.
  • The mortgage term: A shorter mortgage term implies higher monthly payments, so you may only be admitted for a larger mortgage if you pay it off over a longer period.
  • If you apply on your own or jointly: If you apply for a joint mortgage you may be able to borrow more since the income of the other person will be taken into consideration as well.

They also administer stress tests to examine whether you could still afford your mortgage if interest rates increased or if your circumstances changed, i.e. if you lost your job.

Work out your income

Sum up the following to determine your monthly income:

  • Your salary, including overtime and regular bonuses
  • Any income from your pension
  • Benefits and tax credits
  • Income from your investments, including shares, property and savings
  • Money you receive for child maintenance

Work out your outgoings

Make use of a calculator like Nationwide’s budget planner, to sum up the amount of money that you spend every month.

Alternatively, determine your essential living costs and other expenditures yourself:

Calculate your living costs

Credit card balancesOutstanding loans or overdrafts
Food and drinkInsurance you pay for
Student loan paymentsPension payments
Council taxToiletries and cleaning products
Mortgage payments or rentTV licence and subscriptions
Electricity, gas and waterInternet and phone
Petrol and car maintenanceTravel fares
Clothes and accessoriesMoney you save
ChildcareChild maintenance payments
School fees or costsPet costs

What else do you spend on?

Determine the total of how much you spend in an average month on:

  • Holidays and travel
  • Entertainment like music, the cinema, or sporting events
  • Your social life, including seeing friends and dining at  restaurants
  • Buying alcohol and cigarettes
  • Gym memberships and other exercise costs
  • Gifts for other people or luxury purchases

How to afford a mortgage

If your income is presently too low to secure a mortgage on the property you want, you could wait until your income becomes higher or consider the following:

  • Choose a cheaper property, as a lower purchase price means lower mortgage payments.
  • Choose a longer mortgage term, which decreases the amount that you repay every month. However, you will have to pay a higher amount overall.
  • Look for a cheaper mortgage since a lower interest rate can make the repayments more affordable.
  • Lessen your expenses and unnecessary costs. Consider making a budget and spend less.
  • Increase your deposit, which should help you receive a cheaper mortgage.

You should also take into consideration income protection insurance, which could satisfy your mortgage repayments if you were unfit to work due to an illness or accident.

Get the right mortgage

Avoid applying for too many mortgages if you get rejected since this can hurt your credit record and make it more difficult for you to get accepted.

Deciding on the right mortgage for your circumstances can help you get accepted and come with lower costs than unsuitable deals.

You can get mortgages designed for:

  • Buying your first home
  • Self-employed borrowers
  • Older borrowers
  • If you have a small deposit
  • If you have bad credit

Save on bills

You can also cut down on other expenses like the following:

  • Electricity bills
  • Council tax
  • Water bills
  • Gas bills

Will Switching Jobs Stop You From Getting a Mortgage?

Starting a new job could make getting a mortgage harder – even if you will earn more. Here is are the reasons and what you can do regarding this issue.

Why Do Switching Jobs Matter?

Switching to a new job will have an effect on your chances of being accepted for a mortgage since most lenders only offer you a mortgage if you have been in your job for a while.

Various lenders may accept you if you have worked there for three months or less. However, some mortgages are only available if you have been in your job for more than three years.

It depends on the acceptance criteria of the lender- their rules on who they are pleased to offer a mortgage to – which includes your age, employment status, credit record, and income.

Why Would They Turn You Down?

Lenders think that it is riskier to give you a mortgage after you start a new job. You could become unable to sustain your mortgage payments if lose your job because of:

  • Redundancy: When your employer needs to make cuts, the newest employees are normally the first to go.
  • A probation period: Your company could end your contract without notice during this period (unless your role becomes permanent).

If You Currently Earn More

Even though a new job can lessen your chances of getting a mortgage, a higher salary can reduce the impact since it increases what lenders think you can afford to borrow.

You will need to prove your new salary, so ask your employer to verify it in writing.

If You Currently Earn Less

Transferring to a new job with lower pay means that the amount you can afford towards mortgage payments will decrease

This means that you can borrow less, so if you are currently looking for a property, you may need to lessen the price you can pay.

If you have already started with your application, allow your lender to know your new salary and ensure that they can still offer you a mortgage.

If Your Income Is Dependent On Commission Or Bonuses

If your new job gives a lower basic salary but includes commission, bonus payments, or overtime, try to prove to the lenders how much you could earn.

Your payslips can prove this if you have been in a job a few months. If not, a written confirmation of guaranteed bonuses or what commission you can receive may help.

If You Go Self-Employed

If you are working for yourself, you could still obtain a mortgage. However, you will need to be able to prove your income.

Lenders normally need to see your statements and account for at least the past year, and sometimes three years or more.

This implies that you may not be able to purchase a house immediately if you have just gone self-employed.

Should You Delay Buying A House Or Moving Jobs?

You could wait until you have been in your new job a while before you begin house hunting. Your job will seem more secure, improving your opportunities for a mortgage.

Waiting until your probation period is over and you have been in the role for more than six months is enough for most lenders.

If you want to buy a house sooner, decide if changing career can wait until after you transfer.

What If Neither Can Wait?

There’s still a possibility that you could be able to get a mortgage, but you will need to look for a lender that is not put off by your career change.

Contact a mortgage broker since they usually have access to exclusive deals and know which lenders are most likely to accept you.

You could also increase your chances if you can put a large deposit towards the house.

If You Already Have A Mortgage

If you desire to switch to a new mortgage soon, getting a new job can make it more difficult to get a new deal.

It may be easier to change before you transfer jobs if you can do this without any fees.

If your new job has a lower salary, affording your monthly payments can be harder.

What Insurance Will You Need With Your Mortgage?

Your mortgage is possibly the biggest expense you will meet in life, but what happens if you can no longer repay it? Here is a guide regarding the types of insurance that can help you settle your mortgage.

What will you need?

There are four types of insurance that you should consider when taking out a mortgage:

  1. Life Insurance: availed to cover the cost of paying off your mortgage, if you die before it is paid off.
  2. Critical illness cover: availed to help cover the cost of paying off your mortgage if you get diagnosed with a life-changing condition.
  3.  Buildings insurance: availed to cover the rebuild costs if something happens to your home.
  4. Income protection: availed to help cover your mortgage payments each month if you are not able to work because of an accident, redundancy, or sickness.

Buildings insurance

This type of insurance is usually required when you have a mortgage and could save you a lot of money if something damages your home, like a flood or fire.

Without building insurance, you would need to foot the bill of the rebuild of your home, and pay your mortgage at the same time.

Life insurance

If you die during the term of the policy, a life insurance policy could pay off your mortgage. There are two types you could  weigh in on:

  1. Level term life insurance: If you die during the term of the policy, this will pay out an amount that you have chosen.
  2. Decreasing term life insurance: You could avail this type of policy to lessen its payout at the same rate as your mortgage balance every month. Since the payout decreases every month, this will cost less than a level term policy.

See also: How to Claim a Life Insurance Policy

Critical illness cover

If you suffer a stroke or get diagnosed with a serious condition, like cancer, this kind of insurance pays out a lump sum.

Each policy has a list of conditions that it covers, and also a list of exclusions, so examine the terms before you buy.

There are three kinds of critical illness cover:

  1. Increasing cover: The premiums and payout amount increase with the rate of inflation every year.
  2. Level cover: The premiums and payout stay the same throughout the policy.
  3. Decreasing cover: Premiums are normally lower compared to level cover. However, the payout decreases every month. You can make use of this to follow your mortgage as it is repaid.

Some insurance companies let you add critical illness cover to a life insurance policy when you apply.

However, you do not normally get a better deal if you buy the two together, so shop around for both to discover the best cover for the lowest price.

Income protection

An income protection policy could pay you an income until you can work again after having an accident, becoming sick, or even becoming redundant.

These policies can cover up to a set percentage of your income. For example, 65%, or about to a fixed monthly amount of  £2,000.

You could look for a policy that lasts for only one year, or up to the date of your retirement. The longer the policy is, the more expensive it will be.

What is MPPI?

When you take out a mortgage, your lender may offer you a MPPI or a mortgage payment protection insurance policy.

This is similar to a standard income protection policy, so rather than accepting the policy your lender offers you, examine as many policies as possible to get the best price.