Second charge loans

What is a second charge loan or mortgage?

A second mortgage is a type of loan taken out against a home or property made whilst the original mortgage is still in effect. Many businesses choose to take out a second charge loan on commercial buildings as they can be used to help release equity using property or land, to help grow the business.

A second charge loan or mortgage is a good finance option for business owners who already own property including a home. If you’re a start-up business owner or have recently started a company and need to raise capital, second charge loans can be a great way to inject cash flow into your business without having years of accounts to prove.

The ‘second’ part means that, if the business fails to make the mortgage repayments on the second loan, the first mortgage provider would have the first claim to the property repossession. The second charge mortgage lender would then be next in line.

This also means, the second mortgage lender only starts to receive repayments when the first mortgage has been paid off. This means the interest rate on a second charge mortgage tends to be higher, and the amount borrowed will be lower than that of the first mortgage.

How much can I borrow on a second charge mortgage?

Much like your first mortgage, the amount you can borrow on a second charge mortgage will depend on the income of your business and the amount of capital you have in the property. As it is a second loan against a property, the total amount a lender offers will be lower than the original amount you have a mortgage for.

An example scenario would be:

A business owner looking for finance to inject into his business for growth. He'd been declined for unsecured loan funding due to not having a full set of accounts. A second charge loan would therefore be ideal as he could use the equity in his residential (or in any other assets he owns). The minimum amount you can borrow on a second charge is £50k. If you’re looking for funding options at this amount, there are plenty of other loans to consider.

Ultimately, the amount you can borrow as a business will depend on you meeting the lender's criteria and terms and conditions. 

How a second charge mortgage works

Second charge mortgages or loans work by releasing any equity that has built up against property or home, turning it into cash for a business. The mortgage lender offers up the equity in a property as a loan, with a repayment plan that will start once the first mortgage has been paid off.

If you miss payments or default, your first mortgage provider or lender receives all proceeds from the property's liquidation until it is all paid off.

Why do businesses take out second charge mortgages

Like other business loans, companies take out second charge mortgages for a whole range of reasons but they all ultimately want an injection of cash to help develop their business further.

• Help raise working capital

• Encourages growth within the business

• Helps fund important equipment

• Helps buy more stock

• Can be used to repair or fix properties or equipment

Second charge mortgages are a particularly great option for commercial property businesses as they offer a secure option for consolidating debt all in one place that can be repaid in one regular payment as opposed to having lots of loans or business credit cards.

How long does it take to get funds from a second charge mortgage?

Depending on how straightforward your situation is, your business could get the money within 3-4 weeks from applying for a second charge mortgage. Some lenders are even able to clear the funds within a few days as agreeing to a second mortgage is usually much faster than securing the first mortgage.

Our panel of 120+ are always on hand to offer the most competitive options for your business. If you’re considering a second charge loan, our Business Finance Specialists will help you find the right loan for your business. Why not find out whether your business is eligible and start your funding journey here.

What are the benefits of taking out a second charge mortgage?

As with all finance options, there are many benefits to taking out a second charge loan such as being able to keep your existing mortgage deal which can be very valuable if interest rates have gone up or your credit rating has gone down.

Other benefits to second charge mortgages include:

• Easier to access as a secured loan, compared to unsecured loans

• You won’t have to extend your current mortgage term

• You don’t need to pay early repayment charges or penalties to remortgage

As with all business loans, there are benefits and drawbacks to second charge mortgages so it’s important to consider all options before deciding to apply.

Some things to consider when taking out a second charge mortgage

All business loans come with their own drawbacks and second charge mortgages are no exception. Some of the things to consider when looking at second charge loans are:

• Higher interest rates

• Having two mortgages to pay off is a larger commitment

• They can limit the opportunity to move house or property with a good-sized deposit

• They’re not a good option for businesses with a lot of debt already

Second charge mortgages are a great option for some businesses as a secured loan option but there are some things to think about before committing to taking one out.

Can I get a mortgage on a second property?

Yes, generally speaking, you can get a second mortgage to pay for another property if you can prove you can afford the repayments. If you want to keep the property for personal use you’ll need a second home mortgage, and if you plan to rent it out you’ll need a buy-to-let mortgage. 

This is a great option for property developers and people running commercial property businesses, looking for additional finance options.

Alternatives to second charge funding for businesses

There are plenty of other funding options available to businesses who aren’t able to take out second charge loans or don’t have a mortgage to use equity against.

The main alternatives to taking out a second charge mortgage on a property are:

• Applying for other business loans such as an unsecured or bridging loan

• Remortgaging the property (usually for a larger amount)

• Using personal savings or available capital in the business

Whilst there are other finance options for businesses, if your business doesn’t meet the lender’s expectations there are other options available to you.

How can I take out a second charge mortgage?

Before you start applying for a second charge mortgage, it’s important to consider all of the above as the lenders will need to analyse your business accounts and financial state. 

For your business to qualify, you’ll have to demonstrate how much capital you have in a property, and that you can afford to meet the repayments on both mortgages.

Luckily, there are lenders on our panel who can offer second charge loans as a funding option.