So you have decided to look for a second mortgage. Presumably this means you are in need of cash for some reason. It may be you have debt problems and want to consolidate them. Or you may require funds for your child’s school fees or an extension to the house.
Whatever your reason, you obviously don’t have money to burn. So it makes sense not to waste it. This means that it’s not advisable to grab the first quote you get for a second mortgage. You need to shop around for the quote that’s best for you.
• There are several types of lender that offer second mortgage deals, including banks and building societies. Also some financial institutions might provide them, and even some credit unions. If you try dealing with all of these individually to compare deals, it will take for ever and you will be exhausted. The best thing to do is talk to a mortgage broker, who can point you to the best product for you.
• You need to be aware of the various fees that need to be paid to the lender of the second mortgage. All these need to be taken into account before you can reach a judgement about how attractive a deal is.
a) Arrangement fees. Many second mortgage lenders charge a fee, which could be up to 1 per cent of the total loan. The lender may charge a bigger fee if the interest rate is especially competitive. They may ask for it up front, or add it to the loan. If the latter, you will be paying interest on it for the term of the loan, so you should try to get them to let you pay it up front.
b) Higher lending charge (formerly known as Mortgage Indemnity Premium). These premiums are to protect the lender, not you. You don’t normally have to pay a higher lending charge if the loan doesn’t go over 75 per cent of the value of the property, but in the case of a second mortgage it almost certainly will. However, the more equity you can retain in the property, the lower the premium will be. Tip: look out for second mortgage lenders who don’t impose this charge – but make sure they don’t recoup this by charging higher rates.
c) Survey and valuation fees. If you are taking out your second mortgage with the same lender as your first, you may not have to pay these fees. If it is a different lender, you probably will. However, some lenders will offer to waive the fees in order to secure your business – so keep an eye open for these lenders.
• It is important to compare interest rates when choosing your second mortgage, but look carefully at the rate lenders are charging, to make sure it’s not just an “introductory” rate. Sometimes lenders can reel you in with a very attractive figure, but after a period you find you are actually paying more than the going rate. You also need to check whether it is a fixed or variable rate and decide which is better for you. Get the help of a broker or financial adviser if necessary.
It’s important to shop around very carefully and weigh up everything that’s on offer. Check “swings and roundabouts” – i.e. deals that look advantageous in one area but may recoup it somewhere else. If you do your homework carefully, you should be able to make a considerable difference to the cost of your second mortgage. This can only be good for your financial health!
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