Spotlight on second-charge mortgages for landlords

It’s almost impossible to talk about the buy-to-let market without talking about mortgages. Figures from money.co.uk estimate around 60% of landlords fund part or all of their property investment activity using a buy-to-let mortgage.

While most of us are familiar with straightforward mortgages, few of us have heard of second-charge mortgages or know when they are best used. Looking at the property market as a whole, now may be a good time for landlords to explore this option.

Taking out two mortgages

Second-charge mortgages release a lump sum of money from a property, with homeowners and landlords both able to access this type of product. It’s a great alternative to remortgaging to borrow extra money, as it side-steps the early repayment charges that sometimes accompany remortgaging - charges that can run into thousands of pounds.

A second-charge mortgage allows the borrower to keep their main mortgage as is - on their current rate and at the same repayment. A second mortgage, secured against the property, is organised, with the money released to the borrower.

Using equity to your advantage

The main caveat of a second-charge mortgage is there must be equity in the property for the loan to be possible. The value of a second-charge mortgage is based exclusively on the equity in the property. Generally a lender will loan up to 75% of the equity when granting a second-charge mortgage, but the final figure will take a number of additional factors into account.

Additionally, the rate attached to a second-charge mortgage will almost always be higher than that attached to the main mortgage. The rate is, however, likely to be lower than current remortgage, personal loan, bridging loan and credit card rates.

Spend how you see fit

Unlike a primary home loan that is exclusively used to buy a set property, as agreed by the mortgage lender, the money resulting from a second-charge mortgage is paid to the landlord. That means it can be used how and where required.

Of course, the landlord can be frivolous and spend it on cars and Caribbean holidays but in today’s buy-to-let market, there are more astute ways of using any cash generated from a second-charge mortgage. At this point it’s also worth mentioning that a second-charge mortgage needs repaying when the property is sold, and the home is at risk of repossession if the landlord falls behind with repayments. 

Cover costly eco-improvements

Many property investors will need to make energy saving improvements in order to meet the Government’s more stringent EPC standards. As a reminder, all private rentals will need at least a C rating by 2030 – up from the current E.

Going green doesn’t always come cheap. An average solar panel system costs around £7,000 to install, according to MoneySavingExpert, while the Energy Saving Trust says the average cost of installing an air source heat pump in a domestic home is around £14,000. 

Upgrade habitable standards

As well as more ambitious energy saving targets, the Renters’ Rights Bill - expected to gain Royal Assent in spring 2025 – will see Awaab’s Law and a new Decent Homes Standard introduced to the private rental sector. Some landlords may have to make home improvements to meet these new standards, installing new kitchens and bathrooms, improving ventilation and replacing single glazing. 

Fund new investments

Cash generated by a second-charge mortgage can also be used to put deposits down on additional buy-to-let properties – a popular way of growing portfolios when refinancing isn’t as favourable. The money can also be used to consolidate debts elsewhere.

It’s imperative that the sums stack up as a second-charge mortgage needs repaying and could put your property at risk of repossession. Always seek advice from a mortgage broker or financial adviser. If you’d like to know how much your buy-to-let is currently worth, and to work out your level of equity, contact us today.