How Does the Second Charge on a Property Work?

Melinda (Milli) Haine Melinda (Milli) Haine | Loan Underwriter

You may be familiar with what financial institutions call the 'second charge' mortgage. If you are, you know that such mortgages are acquired in addition to primary mortgages already attached to those properties. But do you know anything beyond that? Do you know how the second charge on a property actually works?

Suffice to say that consumers really should understand second charge products before they agree to obtain one. Placing a second charge on one's home is risky business if finances cannot support the extra borrowing. But, we'll discuss that in more detail later in this post. Let us first define what a second charge actually is.

A Second Charge Is a Lien

In complicated matters like mortgages, there are different terms used by the various players involved. Where a bank might refer to a second charge, a solicitor would talk about a lien. They are both the same thing.

A lien is a legal instrument indicating that one party has a financial interest in the property of another. Let's apply this to a first mortgage.

When you obtained the mortgage to purchase your home, the lender that loaned you the money filed a legal document demonstrating an interest in the property. That legal document is called a lien. It legally established the bank's financial interest in your property ?? just in case you default on your loan.

If your house were to be repossessed for any reason, the court would look at any and all claims against the property. As the primary lien holder, the bank that loaned you the money for your mortgage would be first in line to be repaid once the house is sold.

For the record, liens can be placed on just about any kind of tangible property. A mechanic can put a lien on your car just in case you decide not to pay your repair bill. Similarly, a home remodelling company can place a lien on your house just in case you are unable to pay for renovations.

The Second Charge Scenario

When a consumer obtains a second charge, he or she is using the equity in his/her property as collateral. Just like the primary mortgage lender, the secondary lender then places a lien on the property to protect its own interests. This is called the second charge because the lender is second in line behind the primary mortgage lender.

Again, let us assume that you are eventually unable to make the payments on your second charge loan despite being able to keep up with your primary mortgage. Your second charge lender does not need the primary lender's permission to make a claim against your property. That lender can seize your property and sell it to recover what is owed. However, the primary lender must be repaid first.

This works to the advantage of the borrower in that the second charge lender may not go through the process of repossession if there is little chance of actually recovering their money. Court costs are just too high to take that risk. Still, the option is available if lenders want to exercise it.

Now you know how the second charge on a property works. You should now understand why financial experts urge caution before obtaining a second charge loan. It is great to have enough equity in your property to be able to afford to borrow on a second charge product, but the risks always have to be weighed against the potential rewards. Simply put, borrowers have to be reasonably sure they can afford to pay back any money they choose to borrow.

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