Second Mortgage or Remortgage: Which Should I Choose?

A second mortgage is not the same as a remortgage. There is a lot of confusion about this. Second mortgage and remortgage are different ways of getting hold of the equity in your property.

If you have had your mortgage for a fair length of time, you have probably noticed that the value of your property has increased. The most likely way to find this out is if a neighbour’s house similar to yours goes on the market, and you get a surprise when you see how much it is going for.

If this increase has in fact taken place, the difference between the amount of the outstanding mortgage (plus any other loans secured on your property) and the current value of your house is the equity. Using this equity is one of the most sensible ways of raiising extra cash if you need it for any reason.

Basically there are three ways of using your equity:
1. Refinance your mortgage with your existing lender.
2. Remortgage with a new lender, for a larger loan.
3. Keep your existing mortgage as it is and take out a further loan secured on the equity in the property. This is what is called a “second mortgage”.

Each of these methods has its pros and cons.
• The advantage of staying with your existing lenders is that they are familiar with you and your payment record, and also with the property. So there should be fewer checks and formalities to go through, to refinance the loan. However, if it’s a long time since you took out the first mortgage, they may still need a new valuation. They may also need a check on your finances – they know whether you’ve kept up your mortgage payments or not, but they don’t know what other fonancial commitments you may have.
• Sometimes you can actually do much better by switching to a new lender – you may get better rates, as lenders often reserve their best rates for new customers! It quite often happens that people remortgage with a new lender for a much bigger loan, and actually end up with lower monthly payments than before. The lenders will of course need surveys, valuations, credit checks, etc.
• If you take out a second mortgage, this becomes a “second charge” on the property, with the lenders of the original mortgage keeping the deeds. This means that if the house is sold or repossessed, the lenders of the first mortgage have first claim to repayment. The holders of the second charge then have the next claim to recover what is owed to them. The lenders of the second mortgage thus have a higher level of risk, and so their interest rates may be higher than those for the first mortgage. However, they are still competing for your business, so you can still get very good deals on your second mortgage if you shop around. And the rates will certainly be better than for an unsecured loan.

Whichever of these methods of utilising your equity you choose, lenders are very unlikely to release the full value of the equity. They will always wish to retain some equity in the property in case of a fall in value or other emergency. However, if you are looking for a second mortgage, it is possible in some cases to find a lender who will go up to 100 per cent – at much higher rates, to reflect the higher risk.

Whether a second mortgage or a remortgage is better for you will depend on your individual circumstances. A broker or financial adviser will help you decide what’s best for you.

Sean Horton is a Director of Enhanced Wealth Limited who are a specialist mortgage broker offering second mortgages