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Is a Second Charge Mortgage a Good Idea?

The new year usually means a new start, but as we move into 2023, it doesn’t look as if much has changed for the better.

The cost of living crisis is showing no sign of going away, with the price of food, energy and essential items still rising, even though inflation has gone down slightly.

Interest rates are still high. The Bank of England’s base rate is currently at 3.5%, but is expected to rise again to 4% in February.

After the dramatic increases last year, mortgage rates have at last started to come down, but the rate of an average 2 and 5 year fixed mortgage is still over 5%.

According to the Office of National Statistics, 1.4 million mortgage customers are due to re-mortgage this year. More than half of those customers currently have rates of around 2% – moving onto today’s rates is going to be a big shock for most, as they see their monthly costs go up dramatically.

Christmas might be far behind us, but for anyone who used credit to pay for Christmas presents and the expenses that come with celebrating over the holiday period, that cost is likely to be felt throughout the rest of the year.

The debt charity StepChange had more calls from people seeking help and advice about their debts on 3 Jan 2023 than on any other day in the previous year. This was the first working day of the year – the fact that people were so worried about their debts that they called StepChange at the earliest opportunity shows just how desperate they must have felt about their finances.

The reality is that as we move into 2023, many home owners are having to make the choice between paying their mortgage, paying to heat their home, paying off their debts, or paying to feed their family.

So what can you do if you’re starting to struggle with your monthly payments? Or what if you’re someone who wants to use their home to raise some finance, but doesn’t want to move their mortgage onto a more expensive rate?

A second charge mortgage might be the solution that’s right for you.

1. Keep your mortgage rate;

If your mortgage has a good rate, with longer than 6 months left before the deal comes to an end, and you want to raise finance, then it’s probably a good idea to keep it, rather than re-mortgage.

Although no one can predict the future, and there’s still a lot of uncertainty around the mortgage market, the general feeling amongst experts is that interest rates will remain high for the foreseeable future.

If you need the finance now, and can’t wait until mortgage rates start to fall, a second charge mortgage might be a very good option. A second charge mortgage runs alongside your current mortgage – meaning that you can get the funds you need, without re-mortgaging and losing your current mortgage rate.

2. Avoid penalties;

One of the other advantages of taking out a second charge mortgage rather than a re-mortgage, is that you can avoid paying any penalty fees you might face if you exit your current deal early. These early repayment charges – or ERCs – can be a significant amount, depending on the value of your mortgage. There are times when paying off an ERC can make sense, but in general, it’s best to avoid paying them if you don’t have to.

3. Borrow just what you need, for as long as you need;

Another benefit of taking out a second charge mortgage rather than a re-mortgage is the flexibility you have with the size of the loan and the term.

Let’s say you want to borrow £20,000 for a home improvement project. You currently have a mortgage balance of £180,000, and the mortgage has 25 years left.

If you were to re-mortgage, you would have to borrow a total of £200,000 (£180,000 to pay off the existing mortgage balance, plus the £20,000 for home improvements.) It’s likely that you would have to keep the term of the new mortgage the same, or possibly even extend it to make it affordable.

Because you leave your existing mortgage in place when you take out a second charge mortgage, you don’t need to refinance a large mortgage balance, and only have to borrow the amount you need for the home improvements (£20,000 in this example.)

Because the loan amount is smaller, as long as the monthly repayments for the second charge mortgage are affordable (after taking into account your other outgoings) it’s possible to take out the second charge mortgage over a shorter term.

Given the economic situation and the uncertainty about house prices and mortgage rates, more people are choosing to “improve rather than move.” Raising money for home improvements is one of the most common reasons for people to take out a second charge mortgage.

4. Get rid of debt and make life easier;

Another reason is to consolidate existing debts through a debt consolidation loan. The cost of living crisis is strangling households budgets across the country, and many people are finding that their outgoings are far outweighing their income.

In some cases, the reason for this is because households are carrying a significant amount of consumer debt – high interest credit cards, personal loans, car finance and store cards.

That’s not to say that people have been spending thoughtlessly – in many cases, people use credit to cover the costs of an important household purchase, an emergency repair, or the costs associated with life changing events such as the birth of a child, the loss of a job, or a bereavement.

With the price of everyday items being so high, there is rarely much money left over each month for people to pay more than the minimum payment to their debts – meaning that many people can find themselves with debt balances that never seem to get any smaller and last for years.

With a second charge loan you can pay off your existing debts, effectively wiping the slate clean and giving you a fresh start.

As the rates on second charge mortgages are often much lower than credit cards and personal loans, and as the term can be spread over several years, the monthly payments are usually much lower than the total costs of your existing debts.

This means that your monthly outgoings are reduced, giving you some breathing space and making things more comfortable each month. Not only that, but the existing debt is paid off in full – if your debts have been causing you stress or giving you sleepless nights, then this can be a massive weight off your mind.

Although it’s not possible to give specific figures here, as every customer has different circumstances, the amount of money that you can save each month by consolidating debt with a second charge mortgage can be life changing.

5. Speak to Dragon Finance.

If you want to raise some funds without losing your current mortgage rate, or are looking to get rid of debt to reduce your outgoings, give us a call and speak to one of our expert mortgage advisers. Whatever your situation and whatever your goals, they’ll find the best solution for you.