As a homeowner, there may be times when you want to borrow additional money against your property. For example, to pay for home improvements, use as a deposit to buy another property, consolidate your debts, buy out an ex-partner or make a large purchase. If you’ve built up equity in your home, you have various options to consider. Two of these are a further advance and a second charge mortgage.
Both are secured loans and neither of them affects your existing mortgage. This is beneficial if you have a good deal and don’t want to lose it with a product transfer or remortgage. There are key differences to be aware of between a further advance and a second charge mortgage. We’ll explain what these are below.
What is a further advance?
A further advance is an additional loan taken out on top of your mortgage with your current lender. It’s taken out on a first-charge basis, just like your existing mortgage. Interest is charged on the loan and, as it’s a separate loan to your mortgage, the rate charged is different. It also has a different end date for the loan term. If you’re satisfied with your current mortgage deal and lender, a further advance enables you to retain both of them.
As your lender already has your details, it’s usually quicker to arrange a further advance than other loan types. You still need to meet their criteria, however, which includes new affordability checks.
Here are the advantages and disadvantages of having a further advance:
Advantages
- Your lender may offer you an attractive interest rate for the further advance.
- The interest rate is usually lower than the rates charged on personal loans or credit cards.
- Your existing mortgage isn’t affected as the further advance is a separate loan.
- You don’t need to change to a new lender.
- A further advance is usually quick to arrange.
- No legal work is required for the transaction so there’s no need to pay any legal fees.
- You can spread your additional borrowing costs over a long term.
- As you’re not remortgaging, there’s no risk of being penalised with an early repayment charge.
Disadvantages
- You need to pass new affordability checks and meet your lender’s criteria for a further advance.
- Fees are usually charged for arranging the further advance.
- You have to make separate payments for your further advance and your mortgage each month.
- A different interest rate is charged from the one on your existing mortgage.
- The further advance has a different end date to your mortgage, which may make it difficult to remortgage in the future.
- As interest is charged for the duration of your loan term, it can be a more expensive way to borrow additional funds than other options.
- As the loan is secured against your property, this puts it at risk if you’re unable to keep up with your repayments.
What is a second charge mortgage?
A second charge mortgage is a loan taken out in addition to your existing mortgage but via a different lender. This new lender places a second charge against your property. This means that they are second in line after your current lender to recoup their money in the event your property is sold. As they are taking on more risk because of this, they charge a higher interest rate.
You have to prove your affordability not only for the new mortgage but for your original mortgage when applying to the second charge mortgage lender. You also have to get permission from your current lender before you can apply for a second charge mortgage.
Here are the advantages and disadvantages of having a second charge mortgage:
Advantages
- Your current mortgage isn’t affected, which is good if you don’t want to lose the deal you already have.
- The second charge mortgage is arranged via a different lender. This is a good option if the new lender offers a more competitive rate or better terms.
- The second charge mortgage is likely to be quicker to arrange than your original mortgage was.
- You don’t need to live in the property that the second charge mortgage is taken out on. For example, if you have equity in a second home or buy-to-let investment, you can use this as security for the second charge mortgage.
- As a secured loan, it’s usually easier to be accepted than for an unsecured loan. This can make it a better option if you have a low credit rating or are self-employed, for example.
- The interest rate charged is usually lower than the rate charged on an unsecured loan.
- If your circumstances have changed since taking out your original mortgage, such as having a lower credit rating or switching from being employed to self-employed, and you opt for a remortgage, a higher interest rate is payable for that entire remortgage deal. When taking out a second charge mortgage, however, the higher rate is only payable on that specific loan. The interest rate for your existing mortgage remains the same.
- There’s no risk of an early repayment charge, which may be payable if you opt to remortgage instead.
Disadvantages
- You need to get permission from your current lender to be able to apply for a second charge mortgage.
- You have to meet the new lender’s criteria, which includes showing that you can comfortably afford your original mortgage as well as the second charge mortgage.
- The interest rate charged is likely to be higher than the one for your original mortgage to compensate the lender for their increased level of risk.
- You have two mortgage payments to make each month.
- Interest is charged across the mortgage term, making it an expensive way to borrow in the long run.
- The loan is secured against your property, putting it at risk if you’re unable to keep up with the repayments.
- When moving home, both your original mortgage and the second charge mortgage have to be repaid.
Which is best — a further advance or a second charge mortgage?
Which option is best for you depends on various factors. These include how much you want to borrow, the amount of equity in your property and your circumstances. Both allow you to keep your existing mortgage so you don’t have to worry about losing a good deal. Both options remove the risk of being charged an early repayment charge, which can be payable with a remortgage.
A further advance allows you to take out an additional loan with the lender you’re already familiar with. They usually offer you a competitive interest rate. As the lender already has your details, arranging the further advance tends to be a quick process.
If your current lender doesn’t offer an appealing interest rate for a further advance or is unwilling to approve an additional loan, applying for a second charge mortgage with a different lender is a good alternative. You can usually borrow more with a second charge mortgage and may benefit from better mortgage terms.
Get an expert comparison between a further advance and a second charge mortgage
For impartial advice and a comparison between the two options, give us a call on 01322 907 000. Our mortgage brokers can check your eligibility and borrowing potential, the interest rates and terms offered as well as the costs involved for both a further advance and a second charge mortgage.