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Remortgaging and second charge mortgages

Remortgaging is one of the biggest financial decisions that most people will make in their lives. Find out how remortgaging works with our handy guide.

When purchasing a house, whether you’re moving, buying a first home, or becoming a landlord, you might have to borrow money from the bank to help cover the full purchase price of the property.

This borrowing from the lender is called a mortgage agreement. You’ll often agree to borrow a certain amount of money from the lender, which you’ll then pay back monthly over a period of several years.

There are many different types of mortgage and which arrangement is best for you depends on your financial situation and intentions for the property. These can also include agreeing to new payment terms on a property you currently own, such as remortgaging or, alternatively, a second charge mortgage. These terms are sometimes confused as the same thing, but the details of each differ and one or both may not be suitable for your position.

Discover more about taking out a second mortgage and remortgaging your property below.

What is a remortgage?

Remortgaging is agreeing new payment terms with a lender, either a new one or your current provider. By replacing your terms with a new arrangement, you could reduce your monthly payment or free up a lump sum for use elsewhere. Homeowners remortgage for a variety of reasons, including:

Remortgaging might be an option for homeowners who’ve seen an increase in the market value of their property or have grown their equity by a substantial amount.

If you’ve been making your mortgage payments for several years, you may have paid down much of your original agreement and seen an increase in the overall value of your home. In this situation, agreeing new terms with a lender could reduce your remaining monthly payments or free up equity in exchange for a lump sum.

In this situation, you’d be agreeing to give up some of your equity for immediate funds, borrowing from the bank against the value of your home again.

Your property’s equity is equal to the current value of your home, minus the amount you have paid off on your original mortgage. You can then use this figure to calculate your loan-to-value rate (LTV). Having a low LTV means you could secure a new agreement with lower interest or monthly payments, saving you money over the course of your repayment plan.

Is a remortgage right for me?

Remortgaging your property could work if you’ve seen an increase in the value of your property or own considerable equity in it. By agreeing new terms with your lender, you could lower your monthly payments and interest rates, or release equity as a lump sum for use as you see fit.

However, you might not remortgage if you’ve only just bought your property or have seen a decrease in its original value. Remortgaging in this situation could lead to an increase and/or a higher rate of interest on repayments.

It’s worth considering that in switching to a new lender should you decide to remortgage, you may be charged by your previous provider. There may also be legal and administration fees to consider as part of the process of switching lender.

What is a second charge mortgage?

A second charge mortgage works similarly to a secured loan, taken against the homeowner’s property. Typically, homeowners will use second charge mortgages to access funds quickly, rather than agree on new payment terms with a lender.

By releasing equity in your property as money, you’ll effectively be taking out a second mortgage on your home. You can release any funds over £1,000 in this manner, but you will have to pay back the borrowed amount as well as your current mortgage arrangement. Your home acts as the collateral in the agreement, so you could lose it if you fail to pay back the value of your second charge mortgage.

A second charge mortgage can sometimes be cheaper than remortgaging as you won’t pay any exit fees or early repayment charges. You’ll still owe your current mortgage total. You’ll also need to pay off the second charge mortgage fully should you decide to move to a new property.

Is a second charge mortgage right for me?

A second charge mortgage could be right for you if you have a low credit rating, or if you want to borrow a small amount that you can pay off in due course. However, you should be aware of all the financial details before committing to any arrangement.

If you have a low credit rating or are self-employed, you might find it difficult to get an unsecured loan. A second charge mortgage could help in this situation and allow you to access the funds that you require at a lower rate of interest as your home is used as security, however you will still need to be able to afford the monthly repayments.

Remortgaging with a low credit rating could see you end up paying a higher rate of interest on any new agreement. A second charge mortgage works as a separate loan alongside your initial repayment plan.

Agreeing new payment terms on your property can be a good way of releasing equity as funds or reducing your monthly payments. However, remortgaging will only work for some people, so be sure to consider all your options before committing to any new financial plans.

Find out more about remortgaging your property here.


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