What is a third-charge mortgage?

What are the pros and cons of third charge mortgages?

As with any financial product, you need to weigh up the benefits and risks so that you can decide whether a third charge loan is a viable option for you.

Advantages of third charge mortgages:

• You’ll gain access to additional funds, which can help to reduce the immediate strain on your finances.
• Third charge loans are secured against your property. This means they are a lower risk for lenders compared to unsecured loans, where there is no collateral, so you could access lower interest rates than those available for unsecured funding.
• The funds can serve a number of different purposes, such as making home improvements or consolidating debt.

Drawbacks of third charge mortgages:

• They are a greater risk for the lender, who is third in line to get repaid. That elevated risk is then offset through higher interest rates than you would typically see for a first or second charge loan.
• Taking out a third charge loan on your home means you further reduce your available equity in the property.
• If you fail to make your repayments on any of your first, second or third charge loans, you could be at risk of losing your home.

Are there alternatives to third charge loans?

If you decide a third charge mortgage is not the most suitable choice for you, there are other options available. These include:

• Unsecured loans: There are no risks to your property but the flip side is that you may be limited to smaller amounts of money, with higher interest rates and shorter repayment terms.
• Remortgaging: You could explore the potential of refinancing the first and second charge loans on your home, without applying for a third charge.
• Equity release: A loan taken out against the equity in your home, which is repaid once your property is sold when you die or go into long-term care. Typically, this is only available if you’re aged 55 or over.

Why might you need a third charge mortgage?

There could be many different situations that prompt you to explore a third charge secured loan as a possible option. It’s crucial to be sure it’s the right choice for you and your circumstances. But this form of borrowing could help you deal with the likes of:

• Home improvements: Upgrading your property – for example, by adding an extension or making a conversion – can be a great way to invest back into your home and increase its value.
• Debt consolidation: Combine all your existing debts into one and switch to a single monthly repayment rather than several, to make it easier to manage.
• Major purchases: A third charge mortgage could help you cover the cost of larger one-off payments – for example, to finance a car.
• Emergency expenses: Unexpected costs, such as essential repairs to your home or car in the wake of an accident, can put pressure on your finances.

Can you get a third charge mortgage?

Third charge mortgages can be harder to find because lenders are less willing to be last in the queue to be repaid. Some providers do offer them, though, subject to you meeting their eligibility requirements. The broad criteria are often similar to those for any other type of loan and the success of your application will likely depend on:

• Equity: Your lender will work out how much equity you have in your home, once your first and second charge mortgages have been taken into account. You’ll need to have enough remaining equity to be considered eligible.
• Affordability: To be approved, you’ll need to be able to show that you can cover the monthly repayments. Your lender will review your income and your existing debts to assess whether you can pay off a third charge mortgage.
• Credit score: Analysing your credit history will form a part of any application process. This shows lenders how you’ve managed credit in the past and therefore how you may do so in the future.