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What is second mortgage borrowing

What is second mortgage borrowing
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We all have an understanding of exactly what a mortgage is; where you gain the finances to buy a property through a bank or building society. However, it’s not always clear what is meant by a second mortgage and how this affects your initial borrowing.

What is a second mortgage?

A second mortgage refers to a secured loan where you use your home to gain the necessary funds. The lender then puts a second charge on the home, which comes behind the main loan in terms of priority should your property be sold or repossessed. These loans are often taken out to finance home improvements rather than re-mortgaging.

Applying for a second mortgage

The equity you’ve built up in a property is used to provide security when you’re applying for the loan, in case you default on your payments. The equity is the amount of the home you actually own, after the remaining mortgage has been taken off the value of the property. The second mortgage needs to be paid off if you move or you could add it onto a new mortgage.

What is second mortgage borrowing

The benefits

As with any financial decision, it’s important to assess the situation carefully to ensure that taking out a second mortgage is the right option in your circumstances. In some cases it can be the most cost effective route and provide access to the required funds.

A re-mortgage is not always a suitable option for all home owners. In some instances, your credit rating might not be as good as when you took out the initial mortgage. This would mean you’d be put on a higher interest rate when re-mortgaging, which would affect your current payments as well as the additional amount. Therefore, a second mortgage might reduce the amount you’d have to repay each month.

Some mortgage products have large fees attached to them for early repayment. If you would be liable for this when re-mortgaging your property, a second mortgage could be a cheaper option.

Those who are self-employed might not be able to access the right level of unsecured loans due to their financial situation. However, as a secured loan puts your home up as collateral, lenders are able to provide higher amounts than if you were to take out a personal loan.

The risks

There are always risks to be aware of when borrowing any sum of money. You need to consider all the options and look at both the positives and negatives of each situation. This will ensure that you make the right decision.

A secured loan means that you are increasing the risk of your home being repossessed if you don’t keep up the payments on this and your initial mortgage. Those who already have limited finances might struggle to meet the additional payments. You need to consider if any rise in interest rates would still make the repayments achievable. According to figures from the Finance and Lending Association, second charge defaults resulted in 827 homes being repossessed in 2011.

A secured loan is not suitable as a means of debt consolidation. They generally have lengthy repayment periods, anything up to 25 years. This will lead to you paying more in the end, so it’s not worth the risk of converting credit cards, personal loans and overdrafts into a secured loan.

Before you take out a second mortgage, you need to look at all the options available. Do your research and compare the figures to ensure you get the best deal.

 

 

 

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About Catherine Stern

About Catherine Stern

Catherine Stern is a freelance writer with a background in marketing and PR. She currently writes web content on a range of subjects, from finance and business to travel and home improvements. As a working single mum of two young boys she understands the pressures that today’s working parents face and the topics they want to read about.

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