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Secured Loans / Second mortgages

Written by: Matthew Bourne

During the past five years lenders have seen a boom in the
demand for second mortgages as borrowers look to capitalise on
the equity in their home. The low cost of borrowing coupled with
the spiralling value of homes in the UK has led to a substantial
strengthening of the equity position of many a homeowner. The
equity position of some homeowners is in fact so strong that
they now find themselves in the fortunate position of having
more equity in their home than they have debts secured against
their home on first mortgages and other loans.

Buoyed by the healthy state of positive property equity
confidence is running high when it comes to homeowners
committing to further borrowing. Many are taking the opportunity
to secure second and even third charge loans against the equity
in their property in order to release cash funds. Even the more
conservative borrowers are now beginning to see the light,
despite experts predicting of an imminent slowdown in the
housing market.

If you’re thinking about releasing equity in your home through a
second mortgage, here are some things you’ll need to consider
before you take the plunge: -

Interest rates on second mortgages

The interest rates charged on second mortgages are often higher
than those that are levied on first mortgages. This is because
lenders see second mortgages as a higher risk than first
mortgages and so compensate for this risk through fixing higher
interest rates on second mortgages.

The increased risk factor on a second mortgage is down to the
fact that these types of mortgages are a second charge on the
property. That is to say that in the event of you defaulting on
repayment to the point that your home is repossessed, the first
mortgage lender legally gets first bite of the cherry when it
comes to recovery of the loan. For second loans secured against
the property, the lender has to wait its turn, running the risk
that it may recover only part of the loan advanced or in some
cases none of the loan advanced.

Lending criteria

Different lenders have different lending criteria for second
charge mortgages. Whilst all lenders are likely to assess
applicants for a second mortgage on the value of their home,
their ability to repay the loan and their current income to debt
ratio, not all lenders will give the same weight to these
factors in the final analysis. This is why you may be rejected
by one lender but accepted by another on an almost identical
second mortgage offer.

Can you afford the repayments?

For a lender to be convinced that you are able to meet the
repayments on a second mortgage, you’ll need to be sure how
you’re going to repay the loan. You should never take on a
second mortgage without first planning how you will pay the
money back.

Different types of second charge mortgages

There are several different types of second charge mortgages to
choose from. Be sure to get information on all your options and
select the type of second mortgage that is most suitable for
your circumstances. It is advisable to never borrow more than
the current equity value in your home.

About the author:

Matt Bourne is currently working for 1 Track Secured Loans