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Second Charge Mortgages and Credit Scoring – Does a Second Charge Mortgage Hurt Your Credit Rating?
The 2nd charge mortgage market has grown in recent years as more homeowners look for lower-cost ways to raise financing, often choosing a second charge equity loan in favour of remortgaging when the costs to do so would be prohibitive.
However, does a second charge mortgage hurt your credit rating, and can you get a second charge mortgage, bad credit notwithstanding?
We’ll run through all you need to be aware of when it comes to credit scoring, hard credit checks and knowing how a second charge equity loan works.
What Is a Second Charge Mortgage?
In short, a second charge mortgage, or second charge equity loan, is a new, separate mortgage from the one you already have. You might apply for a second charge equity loan because you can’t remortgage without triggering an early settlement charge, for example, or because you wish to borrow against your equity to pay for home improvements, and your current lender cannot help.
Who regulates second charge mortgages – and how are they different from any other mortgage product?
Just like a first charge, or conventional mortgage, second charge equity loan products are regulated by the Financial Conduct Authority when applied to residential properties. The primary contrast is that second charge equity loan lending is normally a little more expensive than a first charge mortgage due to the lender’s perceived risk.
If you were to default on your payments or be unable to pay both mortgages, the first charge lender would have priority in terms of repossessing the property and recouping the unpaid debt, in preference to the second charge lender.
This repayment priority is the reason why the 2nd charge mortgage market normally charges higher interest rates. In some cases, a competitive lender might offer a loan that is significantly cheaper than an alternative financing option.
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Does a Second Charge Mortgage Hurt Your Credit?
We’re often asked about second charge mortgage bad credit products because one common scenario is that a homeowner has sufficient equity to take out a second charge equity loan, but falls outside of the original lender's eligibility criteria due to changes in their credit rating since taking out the first mortgage.
In short, a second charge equity loan could potentially reduce your credit rating temporarily because a lender in the second charge mortgage bad credit sector will necessarily need to run credit checks alongside other due diligence processes such as affordability assessments.
However, as you maintain your repayments, particularly if you are using a second charge equity loan to consolidate other higher-interest short-term debts, you should see your credit scoring improve as you show evidence of responsible repayments.
Alternatives to a second charge equity loan, such as a personal loan, can be detrimental because the more short-term debt you have, the more it may affect your credit record.
Typical Reasons to Apply for a Second Charge Equity Loan
Whether or not you need a second charge mortgage bad credit product, there are several instances where a second charge equity loan could be a viable solution or the best option to meet your financing requirements.
Using a Second Charge Equity Loan for Home Improvements
Most lenders will happily consider second charge equity loan applicants who want to borrow against their equity to renovate, extend or refurbish the property. Because the home is very likely to increase in value, your equity may grow as a result, presenting a lower-risk deal to the lender.
There are a few second charge equity loan products specifically aimed at home improvement lending, usually repackaged as a home improvement mortgage.
Applying to a 2nd Charge Mortgage Market Lender to Raise a Deposit
You can apply for a second charge equity loan to raise the funds necessary to buy another property, either outright or as a deposit. This second charge mortgage type is often called a 'soft' second mortgage.
One example might be when you have found a fantastic investment property or a very low-cost residence but cannot get a mortgage because the building is currently uninhabitable and, therefore, ineligible for a standard mortgage or a buy-to-let mortgage.
Second Charge Mortgage Bad Credit Products to Consolidate Debt
A second charge equity loan can be used to pay off debts, or consolidate multiple smaller, often shorter-term debts, reduce your monthly repayment costs and help you get your liabilities and borrowing under control.
Second Charge Mortgage Bad Credit Lending
If you have an adverse credit report or a low credit score, you may wish to consider a second charge mortgage bad credit specialist. Although it is trickier to secure a product through the 2nd charge mortgage market with bad credit, it is often possible.
Even if you have had problems with your credit before, a second charge equity loan may be possible because the lender has the property as security and, therefore, more assurance than with short-term debt that they will recoup the borrowing plus interest.
A second charge mortgage bad credit product is the same as any other. Still, it is designed for applicants who fall outside the scope of the general eligibility criteria and lending policies elsewhere in the 2nd charge mortgage market.
However, a lender could reject an application if they feel that the repayments are unaffordable, your debt-to-income ratio is too high, or you need to borrow a larger proportion of your equity than they are prepared to lend on a second charge mortgage bad credit deal.
Other reasons a second charge equity loan might be refused relate to the property condition, whether a repossession resale would more than cover both mortgage debts, and where there are complexities associated with the legal status of the property.
Considerations Before Applying for a Second Charge Equity Loan
A second charge equity loan comes with several pros and cons to be mindful of, whether you’re looking for a second charge mortgage bad credit product or want to select a financing option that won't damage your credit score.
Advantages include:
- Borrowing more on a second charge equity loan than an unsecured loan and up to 85% of the equity owned in your property.
- Competitive interest rates when compared with high-interest, shorter-term products.
- Using the funding from a second charge equity loan in any way you wish.
Disadvantages include:
- Adding additional debt secured against your property means it will take longer to own your home outright, and your monthly repayments will increase.
- Needing to pay second charge equity loan fees, although these are often lower than early exit fees to remortgage.
- Often needing to borrow a minimum value, in which case the 2nd charge mortgage market may not be ideal if you wish to borrow a smaller amount.
If you would like independent advice about whether a second charge equity loan is the right option for you or to compare second charge mortgage bad credit products, please get in touch with the whole-of-market team at Revolution Finance Brokers for further insights.
