A second charge mortgage sits behind your existing one and lets you borrow against the equity without changing it. Equity release borrows against the same equity on opposite terms: no monthly payments, no affordability test, and a debt that grows instead of falling. Which of those is worse depends entirely on your circumstances, and this page does not decide it for you.
Both borrow against a home you keep living in. The difference is that one has monthly payments you must keep up, and the other does not, and every other difference follows from that.
Equity release may involve a lifetime mortgage, secured against your property, or a home reversion plan. It will reduce the value of your estate and impact funding long-term care.
The Financial Conduct Authority describe a second charge as a mortgage that lets homeowners borrow against the equity in their property without changing their main mortgage. It sits behind the first mortgage, which is what second charge means.
The comparison people actually want is simple to state. A second charge is assessed on whether you can afford the monthly payments, and you make them; a lifetime mortgage is assessed on age and property, and there is nothing to pay each month unless you choose to. The debt on a second charge goes down. The debt on a lifetime mortgage goes up.
The FCA put second charge at typically less than 4 per cent of regulated mortgage sales, and say consumers mostly use them to consolidate debt.
Borrowing to clear debt →A second charge is a mortgage with a monthly payment and an affordability assessment behind it. If you cannot keep up the payments the lender can seek possession of your home, in the way any mortgage lender can.
That is the other side of the same fact. You are repaying, so the balance falls rather than compounding, and there is an end date. On a lifetime mortgage with no payments the debt grows for as long as the plan runs.
What rolling up does →The FCA say second charge mortgages tend to have higher interest rates than first charge mortgages. They sit behind the first lender in the queue, and the price reflects it.
The FCA name intermediary fees of typically 10 to 12.5 per cent of the loan amount, and say they are difficult to compare. On 20,000 pounds borrowed that is 2,000 to 2,500 pounds before any interest.
What the whole thing costs →| Borrowed | 20,000 |
|---|---|
| Intermediary fee at 10% Before any interest | 2,000 |
| Intermediary fee at 12.5% The top of the range the FCA name | 2,500 |
This is worth quoting rather than summarising. Reviewing the second charge market, the FCA said that because many second charge customers have high debt levels, a significant proportion of customers may have characteristics of vulnerability, including low financial resilience, which can put them at a greater risk of harm.
They also found poor quality advice on whether consolidating debt was suitable at all, and affordability assessments that underestimated what people actually spend. If you are considering one, those are the two things to test in the conversation you have.
A second charge is worse if your income might not cover the payments, because the consequence of that is losing the house.
A lifetime mortgage is worse if what you care about is what is left at the end, because nothing is being repaid and the interest compounds for the rest of your life.
Neither of those is a recommendation and this page does not make one. They are the two questions to take to somebody who can see your figures.
Which is right for you. That needs your income, your outgoings, your age, what you are borrowing for and what you want to leave behind, and it is advice.
What either would cost you. Second charge rates and fees are not published in a form we can verify, so no figures for them appear here beyond the ones the FCA published.
Which of these suits you, or whether either does. A second charge is a regulated mortgage and equity release is regulated advice, and both need somebody looking at your actual circumstances. This page sets out the published difference between them and nothing more.
Equity release may involve a lifetime mortgage, secured against your property, or a home reversion plan. It will reduce the value of your estate and impact funding long-term care.
Questions worth asking about either, and especially about consolidating debt with one.
What is the total fee, in pounds, before I sign anything?
The FCA found intermediary fees of typically 10 to 12.5 per cent and said they are hard to compare. Asking for the number in pounds makes it comparable.
What happens if I cannot make a payment in five years?
The honest answer on a second charge involves the word repossession. It is better to hear it now than to find out later.
Am I consolidating debt, and is that actually a good idea here?
The FCA specifically found poor advice on this. Turning short-term debt into debt secured on your home is the decision, not the rate.
What would I owe at the end on each of these?
One is a falling balance with an end date and the other is a growing one without. Seeing both on paper is the comparison.
Short answers to the things that come up most. None of it is advice, and every figure on this page carries its source.
The Financial Conduct Authority describe it as a mortgage that lets homeowners borrow against the equity in their property without changing their main mortgage. It sits behind the first mortgage in the queue, which is what second charge means, and it is a small market: the FCA put it at typically less than 4 per cent of regulated mortgage sales.
Payments. A second charge has a monthly payment and an affordability assessment behind it, and the balance falls as you repay. A lifetime mortgage has nothing to pay each month unless you choose to, is assessed on age and property rather than income, and the balance grows because the interest is added to it.
If you cannot keep up the payments the lender can seek possession, in the way any mortgage lender can. That risk does not exist in the same form on a lifetime mortgage, because there are no payments to fall behind on. The trade is that nothing is being repaid, so the debt grows for as long as the plan runs.
That depends on the rate, the fees and how long you hold it, and it cannot be answered in general. The FCA say second charge mortgages tend to carry higher interest rates than first charge mortgages, and name intermediary fees of typically 10 to 12.5 per cent of the loan amount, which they also say are difficult to compare.
It is what most people use them for, and it is also where the FCA found the worst practice. Their review identified poor quality advice on whether consolidating was suitable at all, and affordability assessments that underestimated what people actually spend. Turning unsecured debt into debt secured on your home is the decision, not the rate.
Equity release may involve a lifetime mortgage, secured against your property, or a home reversion plan. It will reduce the value of your estate and impact funding long-term care.
One qualified equity release adviser. They will go through your figures and tell you if there is a better answer. It costs nothing and commits you to nothing.
Google Analytics, Microsoft Clarity and Vimeo. Say no and none of them loads. What each one stores, and what Microsoft use theirs for.