Second Charge Mortgage Vs Remortgage: A Detailed Comparison

At a glance

• A second charge adds a new mortgage while leaving the first mortgage in place.
• A remortgage normally replaces the existing first mortgage.
• The best comparison includes the cost of changing the whole first mortgage, not just the extra borrowing.
• Further advances and unsecured borrowing may also be relevant alternatives.

Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.

A second charge mortgage – also known as a secured loan or homeowner loan – can release equity without
changing the existing mortgage. A remortgage replaces the existing first charge mortgage and can include extra
borrowing. Although the two products can serve a similar funding purpose, their structure and total cost are
different.

Terminology: secured loan, homeowner loan and second charge mortgage

In the UK homeowner market, the expressions secured loan, homeowner loan and second charge mortgage are commonly used for borrowing secured against a property where an existing first mortgage remains in place. The precise legal and regulatory treatment depends on the agreement and circumstances, so product documentation should always be checked.

Question	Second Charge	Remortgage
Existing fixed rate	Kept	Usually repaid and replaced
Additional borrowing	Usually preserved	Lost when replaced
Existing ERC	Additional borrowing	May be triggered
Rate applies to	Usually two mortgage payments	New total first mortgage balance
Future refinancing	May require dealing with two charges	Single first charge after completion

Why the existing mortgage matters

If the current first mortgage has a low fixed rate, remortgaging may require the homeowner to give up that rate
on the entire balance. If the deal has an ERC, leaving early may add a significant one-off cost. A second charge
can preserve the original mortgage, but the second charge itself may carry a higher rate and separate fees.

Comparing interest and fees

A remortgage can involve valuation, legal, product or arrangement fees and an ERC on the existing deal. A
second charge can involve lender, valuation, legal and intermediary fees. Fees added to the loan attract interest
over the term. The APRC and total amount repayable provide important context but should be reviewed
alongside the time horizon for which the borrower expects to keep the product.

Affordability and suitability

Both routes require underwriting. An adviser should consider income, expenditure, future changes, existing
debts and the purpose of the borrowing. The FCA also expects consumers increasing borrowing secured on
property to be informed about relevant alternatives such as a further advance, second charge, new first charge
or unsecured credit.

Decision factors

Important questions include: How long is left on the current fixed deal? What ERC applies? How much of the
existing mortgage would be repriced? What is the second charge rate and fee? How long will the additional
borrowing run? Is the homeowner likely to move or refinance soon? The answer can change the relative cost
materially.

Potential benefits and points to weigh

Potential reasons a homeowner might consider this route include access to property-backed borrowing, the possibility of keeping an existing first mortgage in place, and – depending on the product – a longer repayment term or larger loan than some unsecured alternatives. These are not benefits for every borrower and must be judged against the actual offer available.

Property risk: the borrowing is secured on the home, so failure to maintain repayments can ultimately lead to
Total cost: a lower monthly payment can result from a longer term and may mean paying more interest
Fees: lender, valuation, legal and intermediary fees may If fees are added to the loan, interest may be charged on them.
Future flexibility: another charge can affect later remortgaging, moving home or raising further
Eligibility: no amount, rate or approval is guaranteed; decisions are subject to lender criteria, affordability checks and status.

Comparing cost: APRC, fees and total repayable

APRC (Annual Percentage Rate of Charge) is designed to show the overall annual cost of mortgage borrowing over the full term, using the assumptions required by the mortgage rules. It takes account of the interest rate and relevant charges included in the calculation. Some costs may be excluded if they are not known to the lender, so the APRC should be considered alongside the monthly payment, total amount repayable, fees and the loan term.

A useful comparison therefore looks beyond the initial interest rate. Review the mortgage illustration or ESIS, the monthly instalment, all fees, whether fees are paid upfront or added to the balance, the term and the total amount repayable. If a variable rate applies, consider how payments could change.

Credit searches and eligibility checks

An initial eligibility check may use a soft credit search, which is not visible to other lenders and does not affect your credit score. A formal credit application will usually involve a hard search, which is recorded on your credit file and can be seen by other lenders. Processes vary, so check what type of search will be used before proceeding.

Consolidating existing debts into a secured loan may extend the repayment term and increase the total amount of interest payable over time.

Consolidation can simplify several payments into one, but it can also turn previously unsecured credit into mortgage debt. The comparison should include current balances, existing interest rates, remaining terms, any settlement costs, the new secured-loan fees and the total amount payable over the new term. Where a customer is already in payment difficulty, alternatives such as speaking with existing creditors or obtaining free debt advice may need to be considered.

Early repayment and switching

If you repay or switch borrowing early, an Early Repayment Charge (ERC) or another settlement charge may apply under the terms of the agreement. For agreements that fall within the Consumer Credit Act 1974 settlement regime, statutory settlement calculations may also be relevant. Second charge mortgages have been regulated under the FCA mortgage regime since 2016, so the exact early-settlement rules depend on the agreement. Always check the lender illustration and contract before making an early repayment decision.

Worked example

Example: Existing mortgage £250,000 at 2.2%, two years left on the fixed period, with a 2% ERC. Additional
borrowing required: £50,000. A remortgage could trigger a £5,000 ERC and reprice £250,000 as well as
the new £50,000. A second charge avoids replacing the first mortgage but may have a higher rate on the
£50,000 and separate fees. A proper comparison models both options over the period the borrower expects to
keep them.

What an adviser should consider

An FCA-authorised mortgage broker or adviser, like Dragon Finance can compare the available routes in the context of the homeowner’s income, expenditure, property, existing mortgage, credit profile and objectives. Appropriate advice should consider relevant alternatives rather than focus solely on whether a particular second charge is available. Speaking to an adviser does not oblige a homeowner to proceed, although consumers should check at the outset whether any advice or broker fee could become payable and at what stage.

Frequently asked questions

Is a second charge cheaper than remortgaging?

Sometimes, but not always. It depends on the existing mortgage, ERC, new rates, fees, term and loan amount.

Can I remortgage later if I take a second charge now?

Potentially, but the second charge may affect future remortgage options and may need to be repaid or
postponed with lender consent.

What is a further advance?

It is additional borrowing from the existing first mortgage lender, usually on a separate product rate. It can be an
important alternative.

Should I choose the lowest monthly payment?

Not on that basis alone. A longer term can reduce the payment while increasing total interest.