A second mortgage is an additional loan taken out on a property on which there is already an outstanding mortgage. The loan is, like the mortgage, secured on the value of the property.
You might want to do this to pay for redecoration, or to help you start a business. There are several things you need to know about taking out a second mortgage. To begin with, from the point of view of the lender, this is a higher risk than the initial mortgage. Therefore, you will usually pay a higher rate of interest on the additional money than you did for the initial loan.
Secondly, the minimums that you can borrow on a second mortgage can be quite high- one of the better ones is the Royal Bank of Scotland (a low start of £15,000), but many lenders will give you additional loans; including Abbey National, Scottish Widows and the Nationwide.
If you’re the sort of person who might just face a bit of a shortfall every now and then, you might want to consider flexible accounts (The One Account, Woolwich Open Plan, Egg), which allow you to take payment holidays; this could be significantly cheaper than a second mortgage. Alternatively, try getting a 100% mortgage in the first place- it’s not cheap but it’s cheaper than a second mortgage.
One caveat- we’ve had several years of rising house prices, which has given people increased equity from their homes, and the facility for a low rate second mortgage. If that trend reverses, as some analysts predict, and house prices fall, then many people will face the negative equity trap. This will mean a second mortgage is impossible for some people, and more expensive for the rest.
