What Is First Charge And Second Charge Loans?

What Is First Charge And Second Charge Loans?

What Is First Charge And Second Charge Loans?

First charge loans are loans that are secured as the primary debt against an asset, such as a property. They take priority over any other loans secured against the same asset. First charge loans typically have lower interest rates as they are seen as less risky for lenders.

Second charge loans, also known as second mortgages, are additional loans taken out on an asset that already has a first charge loan secured against it. The second charge loan is subordinate to the first charge, meaning the first charge loan gets paid first if the borrower defaults. Second charge loans tend to have higher interest rates to account for the additional risk.

The key differences between first and second charge loans:

  • Priority of payment – first charge loans get paid before second charge loans in event of default
  • Interest rates – first charge loans typically have lower interest rates than second charge loans
  • Risk – first charge loans are lower risk for the lender compared to second charge
  • Security – first charge places primary security interest over an asset, second charge is subordinate

What Are The Pros And Cons Of Second Charge Mortgages?

Here are some of the key pros and cons of taking out a second charge mortgage:

Pros Of Second Charge Mortgages:

  • Access to additional funds while keeping your existing mortgage – This allows you to tap into your home’s equity without having to remortgage.
  • May be an option if you can’t get additional funds elsewhere – Second charge mortgages can provide financing if you don’t qualify for other types of loans.
  • Fast approval and access to funds – Second charge mortgages can often be approved quicker than remortgaging.
  • Interest may be tax deductible – The interest on a second charge mortgage taken out for home improvements may be tax deductible.

Cons Of Second Charge Mortgages:

  • Higher interest rates – Second charge mortgages typically have higher interest rates than first charge mortgages.
  • Additional fees – You’ll usually pay arrangement fees when taking out a second charge mortgage.
  • Second in line for repayment – The first mortgage lender will get repaid first if you default.
  • Requires home equity – You need to have built up equity in your home to qualify for a second charge.
  • Risk losing your home – Like any mortgage, defaulting on a second charge mortgage could lead to repossession.
  • Difficult to switch deals – Remortgaging a second charge mortgage can be more difficult than a first mortgage.

So second charge mortgages allow you to access extra funds secured against your home, but they come with higher costs and risks compared to a first mortgage. Carefully weighing up the pros and cons is important.

What Happens If I Default On A Second Charge Mortgage?

Here’s what typically happens if you default on a second charge mortgage:

  • Missed payments – Missing monthly payments on your second charge mortgage puts you in default.
  • Late fees and interest – You’ll incur late fees and the interest will continue accumulating on your loan.
  • Mortgage lender takes action – After a certain number of missed payments, the lender will begin foreclosure proceedings.
  • Legal notice – You’ll receive a legal notice informing you that foreclosure proceedings have begun.
  • Forced sale of property – With both the first and second lender’s consent, your home can be listed and sold to repay the mortgages.
  • Eviction – If your home is sold and you refuse to leave, the new owner can have you legally removed.
  • Deficiency judgment – If the sale proceeds don’t cover what you owe, you’ll be responsible for repaying this deficiency.
  • Credit damage – Defaulting severely damages your credit score and makes future borrowing very difficult.
  • Prioritized repayment – The first mortgage lender gets paid back first from the sale proceeds.
  • Second mortgage loss – There may not be any funds left to repay your second mortgage after the first is paid.

So in summary, defaulting on a second charge mortgage can end with you losing your home, damaged credit, and still owing money. It’s critical to avoid this by making payments on time or negotiating alternative repayment plans with your lenders.

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