Second charge
Second-charge finance is useful when a UK borrower wants to release equity from a property or asset without disturbing an existing first-charge mortgage — for example, when the first-charge product is on attractive long-term terms that the borrower does not want to lose. The second-charge lender registers behind the first-charge holder and accepts the additional risk of being second in the repayment queue.
Because of that additional risk, second-charge rates are higher and LTV ceilings are tighter on a combined basis. A UK property might support a 75 per cent first-charge mortgage, but a combined LTV including a second charge is rarely allowed above 75 to 80 per cent. Some second-charge lenders cap their own slice at 65 to 70 per cent combined LTV.
Second-charge facilities require the consent of the first-charge holder, recorded in a deed of priority that confirms the ranking and any side agreements. Without that consent, the second-charge lender's position is significantly weaker, which is why most UK lenders will not proceed without one.
Worked example
How the numbers play out
A homeowner-director's property is worth £900,000 with a £450,000 first-charge mortgage (50 per cent LTV). They take a £150,000 second-charge business loan, bringing combined LTV to around 67 per cent. The second-charge lender prices at 11 per cent versus the first-charge rate of 6 per cent, reflecting the subordinated position.
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