A second mortgage is a loan secured against the equity in a property that is not a first mortgage. The second mortgage will come from a different lender than the first mortgage.
A first mortgage on a residential property is regulated by the Financial Services Authority and covered by the Financial Services and Markets Act 2000. A secured loan, however, is not covered by the Act.
Instead, an individual who obtains a second mortgage is entitled to several different forms of protection depending on the value of the loan.
Knowing the facts about a second mortgage and the remedies available to the borrower upon default is important considering the second mortgage will be secured against the borrower’s home.
A second mortgage with an initial value of less than £25,000 will be regulated by the Consumer Credit Act 1974.
Borrowers should be made aware that the Consumer Credit Act provides for a seven day cooling off period. During this time they can assess the terms and conditions of the second mortgage and redeem it if they feel the product is not right for their needs.
A second mortgage with an initial balance exceeding £25,000, however, will not be regulated by the Consumer Credit Act.
Because of this, borrowers should take out an insurance policy that will offer them protection if they cannot make the payments on the second mortgage due to accident, sickness, unemployment, or death.
There are many different policies available from various insurers to cover the payments on a second mortgage and terms and conditions vary considerably. Borrowers should research the market thoroughly before signing up to a policy.
If a borrower does fall into financial difficulty and cannot keep up the repayments on their second mortgage, they should contact the lender immediately to discuss possible solutions.
This is because a second mortgage is secured against the borrower’s home and if the borrower defaults on their repayments the lender has the right to repossess the property and sell it in order to recover the funds.
Because of the risks involved with borrowing money through a second mortgage, potential applicants should consider the downside carefully. Applicants should also consult with an independent mortgage broker to receive impartial and expert advice before securing a second mortgage against their home.