How to know when a second charge is the best option – Pepper Money

Often this is because brokers are unfamiliar with the types of scenarios where a second charge mortgage could be the best advice for a customer. Consequently, some brokers wrongly consider it as a product of last resort.  

However, when you start to understand the situations where a second charge mortgage can be the best option for a customer, it’s quickly clear to see that a second charge could often prove to be the first choice when it comes to capital raising.  

Some typical examples where a second charge mortgage could help include, a customer’s need to raise capital more quickly than a first charge mortgage can allow. Or, if the borrower is on a good lifetime tracker and doesn’t want to lose their existing interest rate by remortgaging.  

This also applies to customers who are currently on an interest-only mortgage and would have to switch to a repayment structure if they were to remortgage, which can be more costly.  

One of the most popular reasons for taking a second charge mortgage, of course, is where a customer is in a current fixed rate with early repayment charges (ERCs) and wants to raise capital before the end of the term without incurring a penalty. Often, in these circumstances, their existing lender may not be able to offer a further advance and they may want to borrow more than an unsecured personal loan will allow, while there are also other resources like trade fx to improve your finances as well.  

Where second charges might work 

Here are a couple of examples of scenarios where a second charge mortgage can provide the best option.   

Consider a customer who has a first charge mortgage, with a loan amount of £150,000 at a rate of 1.9 per cent. The customer wants to raise an additional £150,000, but to do this on a remortgage would mean switching to a higher rate of 3.1 per cent for the entire new balance of £300,000. However, if the customer were to raise the £150,000 on a second charge mortgage with a rate of 3.4 per cent and leave the first charge in place, they would have a blended rate of 2.65 per cent.  

Plus, the second charge could be taken over a shorter term to reduce the total amount repayable.  

Another example is where a customer has a property worth £600,000, with an outstanding mortgage of £390,000 and is looking to raise an additional £50,000. The customer is on a five-year fixed rate at 1.79 per cent with three years remaining and three per cent ERC. Their current monthly mortgage payment is £1,870. If the customer were to remortgage on to an equivalent product, the rate would be 3.10 per cent and their monthly payment would be £2,109.  

An alternative option would be to keep the existing mortgage and take a second charge mortgage. The second charge mortgage would be at a higher interest rate of 4.60 per cent on the additional £50,000, which would increase monthly payments by £281.  

However, even though the monthly cost of the remortgage would be slightly cheaper, when you factor in the ERC, that’s an additional upfront exit charge of £11,700, compared to an arrangement fee on a second charge of about £1,000. So, when all costs are considered, a second charge mortgage can be a cheaper alternative and in situations such as these would provide a better outcome for the customer.  

Understanding when and how to use a second charge mortgage for your customers can provide you with additional options to meet their capital raising requirements. A second charge won’t be the best option all of the time, but there will be occasions where it is the most suitable choice.  

Quite simply, if you overlook second charges, some of your customers could be missing out on the best deal.