What Is a Second Mortgage?

A second mortgage can be a good way to raise a lot of money fast by releasing equity in your home – but take a good look at the interest rates before committing yourself.

Second MortgageThere’s no place like home, and that’s even more true when we’ve finally paid off the mortgage and own the deeds outright.

But in these tough economic times, many of us are taking a close look at our property and wondering whether to release some of the equity we’ve built up in it.

After all, it’s getting more difficult to pay the monthly bills these days – never mind finding extra cash for big-ticket items like weddings, cars, holidays and major home improvements.

And with high interest rates attached to many credit cards and unsecured loans, releasing equity in your home can be a great way to settle existing debts in one go.

That’s where a second mortgage can help.

Second mortgages explained

A second mortgage is a secured loan that’s taken out with the equity in your house as collateral.

So if your house is worth £220,000 and you owe £100,000 on your existing mortgage, you have £120,000 collateral in your property – that’s what you can borrow against using a second mortgage.

However, your first mortgage takes priority over any second mortgage – if you default on any loan secured on your house, the first mortgage lender will get their money first.

That means that second mortgage rates tend to be higher than your main mortgage – lenders see them as being more risky.

Second mortgage interest

As we’ve just highlighted, second mortgage interest rates are usually higher than normal mortgage rates.

The main point though is because the loan is secured, you must be very confident you can make the repayments. If you fail to make second mortgage repayments, your lender can repossess your home – even if you have a faultless payment record on your first mortgage.

Reasons for taking out a second mortgage

You will have your own reasons for taking out a second mortgage, but some of the most common include major expenditure such as buying another home, financing a new car, renovating your existing property, investing in your business or consolidating unsecured debts in a single, more manageable loan.

Who offers second mortgages?

Second mortgages are available from a range of different sources, from normal high street lenders right through to specialist loan companies. The deals on offer vary depending on the lender and your financial circumstances, so be sure to shop around to get the best terms for you.

Securing a second mortgage

If you are thinking of taking out a second mortgage, be aware that you can’t keep it a secret from your main mortgage lender.

When you apply for a second mortgage, your main mortgage lender must be informed – and both your first and second mortgage lenders must agree to the new deal.

Alternatives to a second mortgage

Second mortgages are a great way to get hold of large sums of money fast, but consider your options before taking one out.

First of all, consider what you need the money for. If you need to invest in a company, a business loan might be a more appropriate option. To consolidate debts, an unsecured loan might be more expensive – but won’t put your home at risk.

And if you currently have a good deal with your existing mortgage lender or find one elsewhere, you may benefit from remortgaging your home – swapping your existing mortgage for one of a higher value. This offers you lower interest than a second mortgage, but be careful – paying money off over a standard mortgage term of 25 years can end up more expensive than a shorter term unsecured loan.

Second mortgages can be a godsend in tough times, but if you do choose to take one out be sure to shop around and also consider other finance options.

After all, it’s great to free up extra money, but not if it’s likely to risk your home.

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