Mid-way through the renovation of his six-bedroom detached house in Oxfordshire, spiralling costs and mounting delays threatened to derail the transformation of Oliver Codrington’s family home unless he found a funding solution.
“It can feel desperate. You can end up in this position where you think, not only have I put everything into this property so far but it’s not going to give it back to me unless I put more money in,” said Oliver.
Oliver, 45, and his wife Joanna, 43, bought the property in March 2021 when sub-2% mortgage rates were still common and Rishi Sunak’s stamp duty holiday was saving households thousands of pounds on their move.
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‘Black swan events swallowed my money’
“I stretched myself and bought a property I wouldn’t have bought under normal circumstances,” said the entrepreneur. “I then thought the renovation would be quick and easy and it turned out to be neither.
“Black swan events were going on all over the place. Brexit had just crystallised so there was a shortage of labour, the Suez Canal block tripled material prices – everything was costing a lot more and taking a lot longer as well. I just ran out of money.”
Living in rented accommodation with his wife and two children aged eight and six while the work was underway, the couple needed another £250,000 to complete the renovation of the £890,000 property.
“It was more than I could hustle together from friends, family and zero per cent credit cards,” he said.
Giving up was not an option, says Oliver. At that point he estimates the property would have been worth less than he paid for it so he searched for a solution to save his renovation from ruin.
Remortgaging was not an option. Having secured a 1.4% five-year fixed rate mortgage in March 2021, almost the last of its kind before rates began their march northwards, no mortgage broker or bank would recommend he ditch his ultra-low deal, despite his requests. Prevailing mortgage rates were around 5% at the time.
That’s when Oliver’s broker suggested they look at a second charge mortgage, an option he didn’t know existed, to raise the remaining finance he needed.
How does a second charge mortgage work?
A second charge mortgage is secured against your property. It ranks after your main mortgage on your title deeds.
In the event of a repossession, when the property is sold, your main mortgage gets repaid out of the proceeds first and your second charge lender gets paid last. Because there may not be enough money left from the proceeds of the sale to repay its debt in full, second charge lenders charge a higher interest rate to compensate for the risk.
Scott Clay, a director at property lender Together, said: “Second charges can be useful for raising money for home improvements, consolidating debts such as credit cards or personal loans, raising funds for a large purchase or, in some cases, for business purposes, such as paying a tax bill or legal expenses.”
You may be part way through your mortgage deal which has a low rate that you don’t want to lose. Or, you want to avoid triggering an early repayment charge by remortgaging before your deal expires. A second charge allows you to raise money against your home without disturbing your main mortgage deal.
But it comes at a cost. According to specialist finance broker The Loans Engine, second charge mortgage rates, sometimes called secured loans, range from 5.7% to around 12% depending on the lender and your credit profile.
Lenders typically cap their maximum loan at between 80% and 85% of your property’s value after your mortgage has been taken into account. The term can be stretched up to 30 years.
Most second charge loans are obtained through a specialist broker. The process for getting one is largely the same as a mortgage except that a second charge lender must apply to your bank or building society for consent to put another charge on your property.
Daniel Duggan, intermediary team leader at The Loans Engine, said: “Some first charge lenders may not give consent for a secured loan but that doesn’t always mean there’s no options. We work closely with a panel of lenders, some of whom offer no-consent options so there may still be solutions available.”
‘Remortgaging was not an option for us’
Oliver and Joanna, a chiropractor, borrowed £250,000 at 10.4% in May 2023, but when rates started to fall they negotiated a lower rate of 8.6%.
Although the couple couldn’t get a remortgage due to the unwillingness of lenders to cut short the term of his 1.4% fixed deal, Oliver believes he would have been better off raising the extra cash this way.
“My point was, both my first and second charge rates blend out at around 5% so I would have been better off refinancing my first mortgage even if I was losing the best rate I was ever going to have in my lifetime,” he said.
Oliver was charged fees for arranging the second charge and an exit penalty will be charged when he sells up.
He doesn’t regret his decision, however. “I had no choice but to push on and borrow more because everything else was commercial suicide – you’d end up losing everything.
“I’d say to anyone else in our position, you have to find a way to solve the problem, it’s not relevant how you feel about it, you can’t dwell on anything and have to keep going.”
Risks to consider when taking out a second charge mortgage
Securing more debt on your property increases the risk that you could be repossessed if your financial circumstances worsen, making it difficult to pay both the first and second mortgage on time.
Although second charge mortgages can be stretched over a much longer term than a personal loan, 30 years compared to 10, it means you’ll pay a lot more back in interest over the long term.
Because you’re likely to be borrowing at a much higher interest rate than you would if you remortgaged to release the cash, it can put pressure on your household budget.
Oliver admits that the stress of two mortgages costing around £5,000 a month was a lot to bear and once the work was complete, the couple planned to sell.
“Almost as soon as we took the second charge, the writing was on the wall because we’re talking about the best part of £1 million of debt and I don’t feel that’s sensible.”
He remains positive about taking out the debt, however.
“It was debt that saved the day,” he added.
Oliver and Joanna transformed the property from a “rabbit warren” into an open plan home with a large kitchen with lots of space for entertaining. They quickly found a buyer and will sell the house for £1.73 million – an increase of £840,000, almost doubling its value.
After all debts are repaid, the couple will be £200,000 better off than when they started.
“I’m positioning it in my head that it’s not a bad result because I could have come out of this with a lot less than I had put in at many points. But I don’t think I’ve been paid for the stress.”