What Is a First and Second Charge?

First Charge

A first charge mortgage, commonly known as the main mortgage on a property, holds the primary lien against the property. This means that in the event of repossession, the first charge mortgage lender is paid off first before any other lenders.

Key Characteristics of First Charge Mortgages

  • Primary loan: the first charge is the primary debt secured against the property
  • Repayment priority: in the case of foreclosure or sale of the property, the proceeds are first used to repay the first charge mortgage before any other loans secured against the property
  • Interest rates and terms: first charge mortgages generally offer lower interest rates and more favourable terms compared to secondary loans because they’re lower risk for the lender

Examples of First Charge Mortgages

  • Main mortgage: the original loan used to purchase the property is the first charge mortgage. This is the primary lien on the property
  • Remortgage: when you refinance your main mortgage with a new loan, the new mortgage replaces the original one and becomes the first charge mortgage. This process is known as remortgaging, and it retains the primary position of the mortgage lien on the property
  • Further advance: this is where you raise additional funds with the existing lender. A further advance is technically separate from the existing mortgage, but is still considered a first charge as it’s with the first charge lender

Second Charge Mortgage

A second charge mortgage is an additional mortgage taken out on a property that already has an existing mortgage. It uses (a portion of) the property's remaining equity after the outstanding mortgage balance is deducted as collateral.

Key Characteristics of Second Charge Mortgages

  • Separate loan: it’s a separate loan from your first mortgage, with its own terms, interest rate, and repayment schedule
  • Equity use: you use the remaining equity in your property after the first mortgage to secure the second charge mortgage
  • Priority: in the event of a sale or repossession, the first mortgage lender is paid first, followed by the second charge lender
  • Interest rates: typically, interest rates on second charge mortgages are higher than first mortgages due to the increased risk for the lender
  • Repayment: you make repayments on the second charge mortgage in addition to your existing first mortgage payments
  • Purpose: second charges are often used for specific purposes like home improvements, debt consolidation, or major expenses without altering the first mortgage

What Is the Difference Between First Charge and Second Charge?

The main difference between a first and second charge is that the first charge has top priority and will be repaid first in the event of repossession, whereas the second charge will be repaid with the remaining equity once the first charge is settled.

 

Some other differences between a first and second charge are:

  • The first charge is the original mortgage taken out on the property, often to purchase it. As a remortgage takes the place of the original mortgage, this also counts as a first charge
  • The second charge is a second mortgage taken out on a property where there is already a mortgage on it. It does not replace the first charge but operates alongside it
  • Second charge mortgages tend to come with higher rates than first charges due to the increased risk taken on by the lender
  • Second charge mortgage lenders consider much of the same criteria as first charge lenders when determining what to lend to you, but they also have to consider additional criteria such as your existing mortgage payments and the amount of equity remaining in the property after the first charge balance is deducted

What Is the Difference Between a First Charge and Second Charge Mortgage to Release Equity?

When considering accessing the equity in your property, you might choose between remortgaging (first charge) and taking out a second charge mortgage. Both options enable you to unlock the value tied up in your property, but the key difference lies in how they allow you to access the equity and how they affect your existing mortgage.

Remortgage (First Charge)

  1. Replacing existing mortgage: a remortgage involves paying off your current first charge mortgage and replacing it with a new one, often to secure a better interest rate or release equity
  2. Potentially lower rates: remortgages generally offer lower interest rates compared to second charge mortgages because they hold the primary lien
  3. Early repayment charges: be mindful of any early repayment charges on your existing mortgage, which could affect the overall cost-effectiveness of remortgaging

Second Charge Mortgage:

  1. Additional loan: a second charge mortgage is an additional loan secured against the property, without affecting the terms of the existing first charge mortgage
  2. Higher interest rates: second charge mortgages typically have higher interest rates due to the increased risk for the lender, as they are repaid after the first charge mortgage in case of default
  3. Flexibility: this option allows you to access equity without altering your current mortgage, which can be beneficial if your existing mortgage has favourable terms or significant early repayment penalties

Below is a detailed comparison of the 2 options.

Comparison Table for Second Charge and Remortgage

Feature

Second Charge Mortgage

Remortgaging (First Charge)

Number of Loans

Adds a second mortgage

Replaces the existing mortgage

Repayment

2 separate payments (first and second mortgages)

Single payment under new mortgage terms

Interest Rates

Typically higher than first mortgages

Potentially lower if market rates have improved

Fees

May include arrangement, valuation and legal fees

May include ERCs, arrangement and legal fees

Use of Equity

Uses available equity in the property

Can release equity through the new mortgage

Loan Priority

First mortgage has priority; second charge is subordinate

Single new mortgage has priority

Complexity

Involves additional legal and adminstrative steps

Involves refinancing and possible ERCs

Purpose

Home improvements, debt consolidation, major expenses

Home improvements, debt consolidation, major expenses

Choosing a First Charge vs Second Charge Mortgage

You wouldn’t normally pick between a first and second charge in the most basic sense – as you’d often take out a first charge when buying a property and a second charge on a property you already own. However, you may consider a second charge vs a remortgage or further advance (which are technically first charges), as these can all be ways to release equity on a property you already own and have a mortgage on.

When to Choose a Second Charge

Second Charge Mortgage

  • When you have a favourable rate on your existing mortgage: if your current mortgage has a low interest rate, a second charge mortgage allows you to keep it while still accessing funds
  • When remortgaging would incur ERCs: if you’re still on your fixed deal and/or refinancing would mean you’d have to pay ERCs (early repayment charges) a second charge can be a way to keep your existing deal intact and still release equity
  • For specific funding needs: ideal for financing home improvements, debt consolidation, or other large expenses without affecting your first mortgage
  • When your existing lender can’t let you raise the funds you need: depending on your situation (for example, if your circumstances have changed since you took out your first charge) and the lender’s criteria, you may not be able to take out a further advance which would allow you to keep your rate. When this happens, a second charge is often the most viable option

When to Choose a First Charge

Remortgage

  • To reduce interest rates: if interest rates have dropped or your credit situation has improved, remortgaging can help you secure a lower rate, reducing your monthly payments
  • To release equity: if you need to access a significant amount of equity for major expenses, remortgaging can be a straightforward option
  • To consolidate debt: combining all your debts into a single mortgage can simplify repayments and potentially reduce overall interest costs

Further Advance

  • When you have a favourable rate on your existing mortgage: like with a second charge, a further advance operates as a separate product from your main mortgage, enabling you to keep your existing rate
  • When your existing lender is able to offer you a competitive further advance deal: your lender won’t always be able to offer you a further advance depending on your circumstances and their criteria, but if they are, then you may find this to be a cheaper option

Get a 1st or 2nd Charge with John Charcol

Choosing between a second charge mortgage, a remortgage and a further advance depends on your specific financial situation, the terms of your existing mortgage and your borrowing needs.

Consulting with a second charge mortgage broker like John Charcol can help you determine the best option for your circumstances.

Contact us on 0330 433 2927to find out more.

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