A second charge loan is secured against a property that already has a loan outstanding (a first charge). Furthermore, it is riskier than a first charge loan as the first charge lender gets repaid before the second charge is repaid. Due to the higher risk, second charge loans often carry higher interest rates than first charge loans.
If a property is worth £100,000 and there is a first charge mortgage of £50,000, the borrowing is 50% of the value of the property – that is 50% LTV.
If in addition to first charge mortgage, there is a second charge loan of £20,000 then the total borrowing against the property is £70,000 which represents 70% of its value. So, the total LTV for the property is 70% LTV.
With a second charge loan, the LTV is even more important. Because the first charge lender is always repaid first, second charge lenders are taking a greater risk that they might not be repaid if the property value comes down or the amount of either the first charge or second charge loans increase.
This explains why second charge loans carry higher interest rates if the mortgage requires them to lend a higher percentage of the value (lend to a higher LTV).
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