Many Contractors contact us looking to raise additional funds. In a number of cases the mortgage was originally secured when they were permanently employed and the current lender has shown no appetite to assist now they are contracting. In this situation they have 2 choices, remortgage the whole mortgage away to a new lender (taking on a higher interest rate than they secured 18 months ago) or abandon the plans to raise additional funds……….. But there is another option.
If you possess equity in your existing property, one potential solution is a second-charge mortgage, also known as a secured loan, homeowner loan, or second mortgage.
Within this guide, we provide all the essential information you require when contemplating a second charge mortgage as a contractor. This includes an overview of their functionality and insights into how engaging a broker can assist you in securing favourable interest rates.
What is a Second Charge?
A second charge mortgage involves obtaining a loan by leveraging the equity in your home as collateral, in addition to your primary mortgage. These types of mortgages are commonly used for purposes such as home improvements, debt consolidation, or significant expenses.
Typically, the first and second charge mortgages are held with different lenders, each with varying rates and terms, resulting in two separate monthly mortgage payments. In case of default and repossession, the first charge lender is given precedence.
The rights of a second charge holder include the ability to seize the property and initiate a sale to recover the borrowed amount if the second charge mortgage falls into arrears. Since 2016, second charge mortgages have been subject to regulation under the Mortgage Credit Directive.
Assessment of Eligibility
Your eligibility for a secured loan will undergo a similar evaluation process as that of a first mortgage. Your lender will scrutinise your personal financial situation, including your income, employment status, age, property type, and any history of adverse credit.
It is advisable to obtain copies of your credit reports beforehand to ensure there are no issues that could hinder your loan application.
Impact of Loan-to-Value (LTV) on a Second Charge Mortgage
Similar to the initial house purchase where a deposit is required, lenders typically do not extend credit for the full value of the property to mitigate risk. Instead, they establish a cap on the loan-to-value ratio (LTV), factoring in your existing mortgage.
For instance, if your home is valued at £300,000 with a remaining mortgage balance of £120,000, your current LTV stands at 40% with £180,000 in equity. Assuming a lender limits second charge borrowing to 75%, your total borrowing could reach £225,000, enabling you to secure up to £105,000 as a second charge mortgage.
Additionally, you must meet the lender’s affordability criteria, which considers your income, financial obligations, and existing mortgage payments. Lenders assess affordability to ensure your ability to meet monthly repayments.
Procedure for Securing a Second Charge on a Property
While obtaining a second charge mortgage is typically quicker and more straightforward than a first mortgage, it involves distinct considerations. Therefore, it is prudent to conduct thorough groundwork before finalising your mortgage application.
Consult with Your Current Mortgage Provider
Obtaining approval for a second charge against your property from your current lender is essential. Approval is not guaranteed, so it is advisable to communicate with your lender first to confirm their consent. Written permission is required, so allocate time for this process.
Obtain a Property Valuation
The amount you can borrow is contingent on the equity in your home, which necessitates an up-to-date property valuation. Once you have this valuation, you will have a clearer understanding of the potential loan amount you may qualify for.
Exploring the role of a mortgage broker in securing a second charge mortgage
Securing a second charge mortgage involves navigating through specialised financial products that may not be readily available from mainstream lenders.
To ensure that you are presented with the most suitable product and competitive rates, seeking tailored guidance from a knowledgeable professional is essential. This can be further complicated by your status as a contractor. My Contractor Broker have partnered with a specialist secured loan broker who understands how contractors work and are paid.
Our experts can assist you in various ways, including:
- Reviewing and optimising your credit reports: Your broker will facilitate access to your credit records to verify the accuracy and currency of the information, which is crucial for a successful application.
- Identifying suitable lenders: By leveraging their industry knowledge, our brokers can swiftly pinpoint lenders offering second charge mortgages, saving you time and potentially reducing costs.
- Assisting with application preparation: Your broker will streamline the documentation process, ensuring that all necessary paperwork is compiled. They will also ensure that you have the required permissions from your current lender to proceed with a second charge loan.
If you are a contractor looking to raise additional funds on your current property. Contract us today on 02394 211122