Find out everything you need to know
What is a third charge mortgage?
If you’re looking to explore additional borrowing options, taking out a third charge mortgage could be an avenue that’s open to you.
They’re less common, but there are lenders out there who will provide them as long as the right criteria are met.
But what are third charge mortgages? How do they work? And what are the pros and cons? Read our in-depth guide to find out all you need to know.
What do we mean by a third charge mortgage?
A third charge mortgage is a loan that’s secured against your property. If you take out an additional loan against your home, on top of your initial mortgage, that is known as a second charge mortgage. If you subsequently take out another loan, that’s a third charge mortgage.
The word ‘charge’ in this instance does not refer to fees or costs. It relates instead to the legal interest your lender has in your property, as a result of providing you with the funds to help complete the purchase.
Your initial mortgage is known as the first charge because that lender will be the first in line to get repaid if you sell your property or it gets repossessed. It’s also important to note that your first charge lender may not allow any subsequent charges on your property because it could increase their risk of not recouping the full amount they’re owed, so you need to check the terms and conditions with your first mortgage provider.
If you can secure a second charge mortgage, though, that lender will come next on the repayment priority list. And that’s where we come to third charge mortgages.
The provider of your third charge mortgage will be third on the list to get repaid. That makes it a riskier option for lenders, which is why it’s a relatively rare form of funding. Where these types of loans are available, they also often come with higher interest rates, to offset the greater risk associated with them.
How do third charge mortgages work?
A third charge mortgage works in much the same way as any other type of loan:
- You apply to borrow a certain amount of money.
- You repay it over an agreed period, usually via monthly instalments.
- Interest is charged, meaning you end up paying back more than you borrowed in the first place.
- If you then sell your home or it gets repossessed, your third charge mortgage is repaid in full. But this only happens once your first and second charge lenders have recouped what they are owed.
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.
Can you get a third charge mortgage with bad credit?
Let’s ask Mark Campbell, Loan Manager at Evolution Money to answer that one:
“Securing a third charge mortgage with bad credit isn’t impossible but it can prove more difficult. Lenders will scrutinise your financial circumstances, so demonstrating affordability and a willingness to work on your credit score can make all the difference. Specialist lenders like us will consider applicants with imperfect credit histories but it’s vital to seek expert advice to navigate the terms and options available.”
How to apply for a third charge mortgage with Evolution Money
Hopefully, this guide has improved your understanding of third charge loans and whether they might work for you. Meanwhile, you can always visit our help and advice hub for more useful tips on how to handle your finances.
If you think a third charge mortgage could be a viable option for your situation, you can check your eligibility with us today – without impacting your credit score.
We can lend between £5,000 and £100,000 over repayment terms of 3 to 20 years and we’ve helped more than 30,000 customers find the funding they’re looking for. Want to know what they made of our service? Check out our glowing reviews to see what some of them had to say about us.
Representative 22.93% APRC variable.
For a typical loan of £26,600 over 180 months with a variable interest rate of 19.56% per annum, your monthly repayments would be £484.00. This includes a Product Fee of £2,660.00 (10% of the loan amount) and a Lending Fee* of £763.00, bringing the total repayable amount to £87,030.00. Annual Interest Rates range between 11.7% to 46.5% (variable). Maximum 50.00% APRC. *Lending Fee varies by country: England & Wales £763, Scotland £1,051, Northern Ireland: £1,736.
Think carefully before securing debts against your home may be repossessed if you do not keep up repayments on your mortgage or any other loan secured against it. If you are thinking of consolidating existing borrowing, you should be aware that you may be extending the terms of the debt and increasing the total amount you repay.
