Second charge mortgages are normally taken out against residential houses, but it is possible to take one out against a residential buy to let investment property.
If you are looking for a second charge on your buy to let but are not sure where to start, then we are here to help.
Get the answers you need, plus access to specialist mortgage advice, from our comprehensive guide.
Are second charge mortgages available for buy to let?
Yes they are, there are plenty of lenders who offer these types of mortgage.
They are often quicker to arrange than a normal remortgage, so you can receive the money earlier. This is great if you need the money in a hurry but they do cost more in interest charges.
The option of a second charge enables investors to access the equity without affecting the main mortgage, and potentially incurring expensive ERC’s.
What is a second charge mortgage?
A second charge mortgage, or secured loan, is additional borrowing where a new lender takes a second legal charge on your buy to let property as security for the loan.
You primary mortgage lender will have a first charge over the property, so the incoming lender will be a lower priority with a second charge.
These mortgages are used to access the equity in the property where a further advance or buy to let remortgage is not possible.
What is the difference between a first charge and second charge mortgage?
A first charge mortgage is a type of loan where the bank or lender has the first claim on a property if you can’t make your payments. This means that if you default on the loan, the lender can take possession of the property and sell it to repay the debt.
A second charge mortgage is another type of loan, it is attached to the same property, but it comes after the first charge mortgage.
This means that in the event of repossession, the lender with the first charge will be paid off first before the lender with the second charge. Second charge mortgages are typically used to borrow a smaller amount of money and are used to access equity in a property that already has a main mortgage.
How does it work?
As part of the application and underwriting process, the new lender will need to seek permission from the main lender for the second charge to be put in place.
If they refuse the loan cannot be granted via a legal charge. However, in these circumstances some lenders will accept an ‘equitable charge‘ instead.
You will be borrowing against the equity built up in the property, this means that the valuation of the property is extremely important.
Once the loan has been approved, the money will be transferred to a solicitor and they will then forward this on to you. At the same time the solicitor will register the second charge with Land Registry.
Soon after you will start to make monthly payments to the new lender. These will be completely separate and independent from your main buy to let mortgage.
What happens if you need to remortgage at some point?
You now have two mortgages, so remortgaging becomes a little trickier.
You can either:
- Remortgage just the main mortgage, leaving the second charge in place
- Remortgage both loans and transfer the whole debt to a new lender
Ideally, it would be good to add the second loan to the main mortgage, it will then benefit from a lower rate of interest. But this may not be possible due to many factors that could include: loan to value, eligibility or early repayment charges.
Your mortgage adviser will be able to look at your options, and the cost effectiveness of each one.
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Eligibility criteria
As long as the property type is acceptable (see below) then the main factor will be how much equity there is in the property. Now this can be very subjective as you may believe the property is worth X but the lender says it’s worth Y.
The overall maximum loan to value will be 75%. So the current mortgage balance and the proposed new loan, when combined, must be below 75% LTV. This will be 75% of the lender’s valuation. There’s no need for a deposit as this all comes under the loan to value calculation.
An independent mortgage broker will be able to access the specialist and niche lenders who can offer:
Age
For most lenders the minimum age is 21.
Minimum income
This is usually around £25,000pa but there are lenders that have no minimum income stipulation.
Credit score
Generally, you would need a good credit report with a medium to high credit score. However, there are lenders that do not use credit scoring.
Maximum loan
Loans are available upto £500,000 but will always be subject to LTV restrictions.
Tenancy
Must have an AST but DSS tenants are acceptable.
Acceptable property types
As you already have a main BTL mortgage in place, it is highly likely that your property will be acceptable.
While options do exist for the property types listed below, you will find that your choice of lenders will be limited.
- Ex local authority/council
- Semi-commercial
- Flats above commercial
- HMO Houses of multiple occupancy
- Regulated buy to lets
- Non-standard construction
- Currently uninhabitable
When to consider a second charge
A second charge mortgage on a buy to let can be quick and simple to arrange. However, it is important to consider other alternatives before jumping in, as they are not the cheapest way to borrow.
CURRENT LENDER
You should first see what options your current lender may have. Most likely this will be a further advance, on top of the main mortgage. This would be setup in a similar way to a 2nd charge but the loan is from your existing lender.
Not all lenders will offer additional lending of this type, or perhaps you don’t fit their criteria right now.
REMORTGAGE
Remortgaging to a new lender is a popular option and gives you the ability to apply for a higher mortgage amount and select a new interest rate for the whole mortgage.
If you have high exit fees on the main mortgage then moving to a new lender may not be cost effective at the moment. You will also be required to meet the new lender’s eligibility requirements as part of the application process.
If these other options are not available to you then a second charge mortgage is a suitable alternative.
This would involve applying for a second mortgage with a new lender, which sits alongside the main mortgage you have now. Your current lender will be asked to approve the legal second charge which needs to be registered against the buy to let property.
Borrow against the equity
Generate a mortgage deposit
Raise money for refurb costs
Pay off a more expensive bridge
Bridging Finance
There may be situations where even a secured loan is not possible. Perhaps you are unable to meet the affordability criteria, or you have bad credit on your credit history.
In these scenarios it may be worth looking at a second charge bridging loan. These are more temporary in nature, so you will need a way of repaying the loan within 12-24 months.
Lenders offering standard bridging loans are quite tolerant where a poor credit history is concerned. They mainly look at the property and loan to value when making their decisions.
If the credit problems are more serious then a non-status bridging loan could help. These are expensive but the lender won’t need a credit search.
How to get one
Maximise your chance of mortgage approval by using a whole of market mortgage broker.
A second mortgage can be an effective way of releasing funds from your buy to let, but the market is not designed for making direct applications.
Many of the lenders are smaller banks, or specialists, who want to have their business supplied by mortgage brokers and intermediaries, and do not wish to deal directly with borrowers.
This type of niche borrowing requires expert knowledge and experience, to find and secure the best deals.
We work with an award winning broker who can offer great advice and an efficient customer service experience.
Speak to an expert on second charge mortgages
FREQUENTLY ASKED QUESTIONS
Can my lender refuse a 2nd charge?
Yes they can. Formal permission is required from your current lender before the legal charge can be put in place. If they refuse then the loan cannot proceed.
Can I use the money to buy an investment property?
Yes. The money raised can be used for many different reasons, including funding an investment property. The loan may help you to purchase another property outright, or provide the deposit for a buy to let, or holiday let mortgage.
Are they available as interest only?
As they are unregulated and secured against an investment property, most lenders will be able to provide an interest only option.
Can you get a loan with bad credit?
Yes this is possible, depending on the type of bad credit, there may be a need to approach a lender who specialises in these cases.
Will this work for a regulated buy to let?
If a buy to let is classed as regulated then it means that it is occupied by someone in your immediate family. Obtaining a second loan in these circumstances is a bit more challenging, due to the FCA regulations. However, there are solutions that your broker will be able to recommend.
How long does it take?
The length of time it takes to get a secured loan will vary between lenders. They are normally quite quick, and most will be completed in 2-4 weeks.
