Strategic Ways to Use the Second Charge Mortgage
More often than not, people think second charge mortgages as a way of consolidating debts. Doing as much is certainly valid by any definition. Second charge mortgages are great tools for debt consolidation because they allow borrowing tens of thousands of pounds at a better rate and with better terms than you can get with other kinds of loan. Still, there are plenty of people who use a second charge mortgage for something other than debt consolidation.
Below are three strategic ways to use a second charge mortgage according to Loan Talk contributor and second charge expert Ian Scarrott. Before we get to them, it is necessary to briefly remind our readers how second charge borrowing works.
When you apply for a second charge mortgage, you are asking to borrow based on the current equity in your home. The primary mortgage holder on your property holds the first mortgage while the secondary lender holds the second mortgage. Either the primary or secondary lender can repossess the home for repayment if the homeowner defaults.
With that out of the way, here are the three strategic ways to use a second charge mortgage:
1. Addressing a Bankruptcy Scenario
Going through personal bankruptcy is never a good thing. It ruins your credit rating and forces you to work with a blemished record for up to six years. However, with a skilled mortgage broker and a willing lender, you could use a second charge mortgage to annul a bankruptcy.
Scarrot wrote in his post about a client facing bankruptcy with Â£30,000 in debt. Once he added in court fees, trustee costs, etc., his total bill for going through bankruptcy could have approached Â£50,000. The client was able to get a second charge mortgage to pay off everything he owed, for less, preventing his record from being blemished.
2. Substituting for a Bridging Loan
Bridging loans are great short-term financing tools frequently used by developers and buy-to-let investors. The major disadvantage is the interest rates attached to them. A second charge mortgage can raise the same amount of cash as a bridging loan with cheaper interest rate and easier terms. However, there is a caveat here: if repayment is spread over too long a term, even a lower interest rate could end up costing more than the bridging loan. These kinds of situations have to be looked at carefully. Borrowers should be doing the maths to make sure the second charge mortgage is the better deal. More often than not, it will be.
3. Extensive Refurbishments
Next to debt consolidation, the second most popular reason for taking out a second mortgage is to do refurbishments. This is common knowledge among homeowners. But did you know that a second charge mortgage does not have to be limited to Â£50,000 or less? You can get a loan worth hundreds of thousands of pounds if you work with a broker who knows where to find them.
In his piece, Scarrott wrote about a client who borrowed Â£650,000 on a second charge mortgage. This client wanted to do extensive renovations on a high-value property that his lender was willing to take a chance on. The point is this: do not necessarily discount a second charge product if you are planning renovations in excess of Â£50,000.
The second charge mortgage is an excellent way to use the equity in your property to do a variety of different things. Here we have listed just three strategic ways you could use such a loan. There are more, limited only by your needs and the amount of equity you have.
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