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Second charge mortgages: costs, how they work and when they could work for you

If you’re looking to carry out home improvements or consolidate your debts, and you don’t want to remortgage, then a second charge mortgage could be the perfect option.

How do second charge mortgages work?

Second charge mortgages are a way to borrow against your property that run alongside your existing mortgage.

Second charge mortgages work rather like first charge mortgages, in that you borrow a specific sum over a set term and then make monthly repayments in order to clear that debt.

There is one key difference, however. Rather than borrow against the value of the property, you instead borrow against the equity that you hold in the property.

Let’s take an example. I have a house worth £200,000, with a £150,000 outstanding mortgage.

If I want to take out a second charge mortgage, I’ll be borrowing against the £50,000 equity I hold in the property. In other words, the bit of the property that is mortgage free.

If things go wrong and your property is repossessed, then the funds raised from the sale will first go towards clearing your outstanding mortgage, with anything left then going to pay off the second charge mortgage.

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Are second mortgages popular?

There’s certainly been a striking increase in the number of borrowers opting for second charge mortgages in recent times.

The Finance and Leasing Association, the trade body for the sector, releases monthly figures highlighting both the volume and value of new second charge agreements.

In its latest release, it found that in November there were 2,584 new deals, worth a total of £114 million. That is up by 36% and 48% respectively on the previous month, while the volume and value of deals in the 12 months to November were up by 36% each.

In other words, significantly more people are now making use of second charge mortgages.

Another factor here is the massive house price growth seen since the start of the pandemic.

Significant numbers of homeowners now have larger equity stakes in their properties, and as a result, are better able to take advantage of that through a second charge mortgage.

Why do people take out second charge mortgages?

There are two common reasons for homeowners opting for a second charge mortgage, both of which are seeing far more interest than usual at the moment.

The first is home improvements. If you want to build an extension or convert an attic into a new room, then you may not have the savings set aside to cover the cost of that work.

That means having to borrow some money, and you may not be able to raise enough through credit cards and personal loans. Instead a second charge mortgage could work.

The other big driver of second charge mortgages is debt consolidation.

Some people may find they owe money across a host of different debts, and find keeping on top of the repayments ‒ as well as what they are actually being charged in interest ‒ tricky.

By combining them into a single debt, at a single rate of interest, it may make clearing that debt more straightforward.

Both of these drivers have seen a significant spike in recent times.

An awful lot of people have opted to adapt their homes through the pandemic, so that they are more appropriate as a workspace for part of the week, while the financial shocks of Covid-19 have caused some to take on additional debts in order to keep their heads above water, and they now want to get those debts under control by consolidating them.

The pros and cons of second charge mortgages

There are a few notable benefits to taking out a second charge mortgage, rather than remortgaging, if you need to raise funds.

If you opt to remortgage, then first and foremost you may have to pay an early repayment charge. This is calculated as a percentage of the outstanding mortgage, so can easily run into many thousands of pounds.

What’s more, doing so means you give up your existing rate and have to apply for a new one.

That’s great if rates today are lower than when you took out your initial loan, but the reverse could easily be true.

In addition, as you are increasing the size of your loan, you may find that you fall into a higher loan-to-value band for a mortgage, which means that you’ll have to take on a higher interest rate. All of those factors combined can make remortgaging in order to raise funds a pretty expensive method.

However, you don’t have to worry about those issues if you take out a second charge mortgage.

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As you are borrowing against the equity you own in your property, your first mortgage is left untouched. As a result, there are no exit fees or interest rate jumps to worry about ‒ you simply carry on enjoying that initial rate until it reaches the end of its term.

There are some downsides to be aware of though. Second charge mortgages tend to come with slightly higher rates than you will get from a first charge mortgage, which is important to bear in mind.

That’s because of the second charge mortgage sitting behind the original mortgage in the priority list in the event of a repossession.

In effect, the lender is taking a bigger risk lending to you, and as a result, wants to balance that out with a higher rate of interest.

What’s more, second charge mortgages are something of a specialist area of the market. Not all lenders off them, so you will undoubtedly have a much smaller range of options to choose from than with a simple remortgage.

In fact, some second charge lenders only offer their deals through mortgage brokers. As a result, securing one may mean that you need to make use of an adviser, which will likely mean incurring an advice fee.

Where can I get a second charge mortgage?

While some mainstream lenders offer second charge mortgages, the fact is that some of the most competitive deals come from lenders you’ve probably never heard of.

What’s more, they often only offer their deals through a mortgage broker.

That means that if you want the best range of options, and some guidance on which lenders are most likely to be happy to offer you a deal, you’re best off speaking to a mortgage broker.

By John Fitzsimons

Source: Love Money

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Why second-charge loans could be the answer for persistent debt borrowers

Second-charge loans – After a difficult 12 months, prospects for the second-charge market in 2021 look encouraging.

We have seen significant levels of enquiries from advisers and their clients, while lenders have also responded by revamping their product lines and criteria.

It is undoubtedly the case that the core uses for second-charge loans, such as for home renovations or consolidating debt, have not disappeared with the pandemic.

If anything, they have become even bigger drivers for borrowers.

One additional area where second-charge loans could prove particularly useful, but which may not be on the radar for mortgage advisers, is for clients classed as being in ‘persistent debt’.

What is persistent debt?

Last year, the FCA introduced a new definition for borrowers in what it termed as ‘persistent debt’.

This was classed as borrowers who have been charged more in interest and fees on their credit card and have paid just the minimum payment for the preceding 18 months.

There’s no shortage of ‘persistent debt’ borrowers either. A study by the FCA last year suggested there are as many as three million credit card customers who are in persistent debt, who have paid an average of around £2.50 in interest for every £1 repaid.

Given the difficulties of the last year, let’s be clear – the number of persistent debt borrowers is only likely to have increased.

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The role of second-charge loans

So, what’s that got to do with second charge mortgages?

Well, credit card providers are required to write to borrowers in this position and put together a plan with them to start actually clearing that outstanding debt.

If they can’t, then spending on the card may be frozen.

Now, for some borrowers this won’t be a huge problem. They may have the disposable income to increase the amount they are paying each mont, or even simply pay off their balance each month, and carry on as usual.

But let’s be clear, the pandemic means there are far fewer borrowers in a position to just absorb those larger payments without it causing further issues.

As a result, these borrowers face having their cards frozen unless they can come up with the funds to get out of this persistent debt classification.

One customer of ours with credit card debts of c.£30,000 had their minimum payments increased with little notice from £435 a month to just under £1,000.

Their credit card company wanted them to pay twice the interest accrued that month as a means to drive down their balance.

Unable to take such a drop in disposable income and while in the middle of a fixed rate period on their first-charge mortgage, their financial adviser successfully identified a second-charge mortgage as the solution and introduced them to us.

With a significant monthly saving, as well as an overall saving over the term of the loan, the client is far happier and has vowed never to use their cards again.

With a second charge mortgage, homeowners can tap into the equity they have already built up in their property, releasing money to clear that outstanding credit card debt and maintain the card as a spending option, without having to touch their existing mortgage.

It’s a smart way to sidestep any potential early repayment charges or the risk of having to move to a higher interest rate on their first-charge mortgage.

What’s more, the speed of arranging a second-charge loan is now extraordinary.

We’ve had cases go from initial enquiry to completion in less than a week, an unbelievable turnaround that – chances are – isn’t going to be possible through the usual remortgage routes.

These speeds have a tangible benefit too.

By delivering that funding so quickly, it means the client can clear that balance and remove the risk of their cards being frozen within a matter of days, rather than suffering through the uncertainty and stress of it dragging on for weeks, or even months.

Going the extra mile

We know only too well that mortgage advisers across the country pride themselves on delivering a holistic service, on helping their clients with financial issues and queries beyond a simple purchase mortgage.

And that’s why it’s so important for advisers to speak to their clients about their credit card position, about whether they fall into the persistent debt category and have a way out of it.

The FCA’s approach to persistent debt borrowers provides the advice profession with an excellent opportunity to reopen those lines of communication with your existing client bank, and to steer them away from the risk of having their spending options reduced.

Clients remember those advisers who go the extra mile; it’s a way to secure their business for life, not just for their next home purchase.

By Barney Drake

Source: Mortgage Introducer

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