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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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Second charge agreements more than double in August ‒ FLA

The second charge mortgage market has continued to show signs of recovery with the number of new agreements and value of new business more than doubling compared to the same period last year.

According to the latest figures from the Finance & Leasing Association (FLA), there were 2,314 new second charge agreements in August, just over double the figure from the previous year. Last year, the market recorded 1,134 new agreements for August.

This continues a trend of growth, with 7,054 agreements in three months to August, more than double the figure of 2,761 during the same period last year.

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In the 12 months up to August there were 22,880 new agreements, which was up five per cent on the year before.

The value of new business for August was pegged at £95m, up from £43m during the same month last year but on a par with £102m in August 2019.

For the three months up to August the value of new business was estimated at £297m, and for the 12 months the value was £956m.

FLA’s director of consumer and mortgage finance and inclusion Fiona Hoyle said: “The second charge mortgage market continued its recovery from the pandemic in August. The market has reported more normal levels of new business in recent months which we expect to continue in the final quarter of 2021.”

By Anna Sagar

Source: Mortgage Solutions

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House price jumps make second charges a compelling debt consolidation option

As we head towards the end of the year, many advisers will be hearing from clients who want to get to grips with their debts. The run-up to Christmas often coincides with borrowers taking a step back from their finances, recognising they would like to be paying less for their various forms of credit, and investigating their options for consolidating those debts together into a single monthly payment.

Clients who want to consolidate their debts will have a few options if they want to make use of their property asset, but it’s important for advisers to consider all of those possible solutions rather than simply the one they are most familiar or comfortable with.

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Remortgaging for debt consolidation

One option will be remortgaging, taking out a larger loan so that they can clear all of those existing debts on credit cards, personal loans and the like. They then have just one debt to keep on top of, their mortgage.

It’s certainly a simple option – there will only be one repayment date to monitor, one interest rate to be aware of. But there are a couple of potential downsides that come from the remortgaging route.

The first, and potentially most punitive, is the risk of having to pay an early repayment charge. Advisers don’t need me to tell them that the vast majority of their clients are likely to be on fixed-rate mortgages these days, and more often than not they are lengthy ones. Given the way ERCs are calculated as a percentage of the outstanding mortgage balance, they can easily become a considerable cost if your client happens to be only halfway through a five-year fixed rate. That’s an exit fee that is really going to sting on the way out.

That’s not the only financial hit that comes from remortgaging either. Your client will also have to switch rate too. That’s not a bad thing if they happen to be on a poor deal but given the level of competition we have seen in recent years there’s a real risk that they will have to move to a less attractive rate, particularly if the additional borrowing moves their loan into a higher loan-to-value band. As a result, remortgaging in order to clear those additional debts may mean that not only does the client have to hand over thousands in ERCs, they also move onto a higher interest rate, with a more substantial mortgage balance to boot.

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It doesn’t have to be like this

There is a clear alternative though, in the form of a second charge mortgages. And not only does a second charge offer a different route for borrowers, it actively avoids some of those potential downsides that come from remortgaging.

It’s worth emphasising the fact that a second charge mortgage is secured against the equity the borrower holds in the property. As a result, the original mortgage is unaffected by the loan. That means no concerns over exit fees, moving LTV bands, or shifting interest rates – the client can carry on as usual with that first-charge mortgage, and continue to benefit from the excellent rate that you secured for them.

A second charge stands separate from that original mortgage, meaning there is no unpleasant knock-on effect from raising the sums needed for the debt consolidation.

Rising equity levels

It’s impossible to ignore the considerable growth in house prices that have taken place over the past year or so, off the back of the stamp duty holiday. That tax break has caused huge numbers of would-be buyers to take the plunge and pursue a move, and it’s driven up prices across the board.

In fact, the latest figures from the Office for National Statistics show that the average property price jumped by a massive 10.6% in the 12 months to the end of August, meaning a new average price of £264,000. To put that in cash terms, that’s a rise of around £25,000 compared to a year ago.

And that’s really good news for any borrower considering a second charge for debt consolidation purposes. That price growth means they hold far more equity in their property, and so are better positioned to raise the funds needed in order to clear those debts.

The demand for help with debt consolidation is only going to grow in the months ahead, so it’s important that advisers keep on top of the full range of options open to their clients. If they aren’t comfortable dealing with second charges themselves, then now is a good time to find a second charge specialist to partner with who can help their clients find the best possible funding solution.

By STEVE BRILUS

Source: Financial Reporter

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Analysis: six squeezes on the UK economy from bills to shopping to petrol

Britain is short of 100,000 lorry drivers, energy firms are sinking, food items are running scarce and employers are scrambling for staff as multiple crises erupt.

Deliveries
Many of the problems facing the economy relate to Britain’s shortage of 100,000 lorry drivers – 96% of logistics businesses are having problems recruiting, and businesses are starting to run short of warehouse staff, van drivers, mechanics, technicians, forklift drivers and transport managers, according to Logistics UK. It said that19,000 HGV drivers have left the UK because of the pandemic and Brexit and 45,000 new drivers have not been able to take tests due to Covid.

Petrol
Ministers were forced to deploy army tanker drivers to help fill petrol stations last week, as the transport fuel crisis pushed into its third week. The shortage, prompted by a lack of lorry drivers and by panic buying, has affected London and the south-east most severely. Fuel is now more generally available, but 12% of petrol stations in the region were still without fuel last Thursday, according to the Petrol Retailers Association.

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Bills
Gas and electricity bills went up £139 on average in October, and will rise again unless wholesale prices of natural gas fall. Customers may pay up to £600 more per year, and National Energy Action warned last week that the number of families struggling to heat their homes could rise by 1.5 million to 5.5 million. So far 12 energy firms have gone bust this year.

Industry
Gas bills are not capped for businesses, which led to fertiliser factories shutting down last month, creating a carbon dioxide shortage. Steel, glass, paper, ceramics and other heavy industrial manufacturers say they may be forced to stop production – which could mean the permanent closure of some plants.

Retail
Shelves in shops and supermarkets have been emptying. One in six adults have been unable to buy essential food items in the past two weeks, according to the Office for National Statistics, and nearly a quarter said they had not been able to buy other non-essential items. People are also waiting longer for prescriptions. The government has appointed a supply chain adviser but logistics firms believe the problems will get more severe in the run up to Christmas.

Vacancies
With about 2 million job vacancies to fill already, employers have started scrambling for about 100,000 temporary staff to fill Christmas roles, with Royal Mail, Tesco, Sainsbury’s, Amazon, Morrisons and John Lewis looking for staff. Ministers appear to have pinned their hopes on the end of furlough last month, which removed support for about 1 million workers on the scheme.

By James Tapper

Source: The Guardian

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FLA: Second charge mortgage new business volumes up 195%

Second charge mortgage new business volumes grew by 195% in June 2021, according to the Finance & Leasing Association (FLA).

As a result, the number of new agreements in June was 1,960, and the value of this new business was £91m.

In the three months to June 2021, the number of new agreements rise by 208% to 5,853 and the value of new business increased by 217% to £260m.

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Annually, the total number of new agreements fell by 21% to 19,903 and the value of new business dropped by 24% to £833m.

Fiona Hoyle, director of consumer and mortgage finance and inclusion at the Finance & Leasing Association (FLA), said: “The second charge mortgage market continued its recovery in June as new business grew for a third consecutive month.

“In H1 2021, new business volumes increased by 21% compared with the same period in 2020, and we expect further growth during the second half of this year.”

By Jake Carter

Source: Mortgage Introducer

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Second-charge optimism is shining through, according to the latest figures

The latest figures for the second-charge market, from the Finance & Leasing Association (FLA), make for positive reading.

It found that the value of new business for March came to £88m, the most positive month for new lending in a year, while the number of new loan agreements is now unchanged from last March.

It is an encouraging demonstration of how the market has picked up from the difficulties posed by the pandemic.

Fiona Hoyle, the director of consumer and mortgage finance at the FLA, said that members of the trade body were “increasingly optimistic” about the outlook for the market, and in my view that optimism is shining through in the way that lenders have behaved over the last couple of months.

There’s no escaping the fact that lenders in the second-charge market are raising their game and revamping, not only by product, but also by the way they lend.

Some are competing on price, unveiling new product ranges that are genuinely eye-catching on rate alone, while others are looking again at their lending criteria and identifying ways to open up their products to groups of borrowers who might ordinarily be excluded from the seconds’ sector.

What’s happening across the board, even from those lenders who aren’t adjusting their products, is a wholesale improvement in the level of service on offer.

Whether it’s greater use of technology or simply a revision in their lending processes, the industry as a whole is doing a fantastic job in looking at how it works with fresh eyes, and finding new, innovative ways of delivering a more efficient and satisfying experience for everyone involved in each case.

Compare the market today to the seconds market we saw just a few months ago, and the difference is extraordinary.

This is a market where the lenders are not just open for business, they have a particularly strong appetite to lend, and are launching products that opens up this sector to a wider range of prospective borrowers.

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The road ahead

This positive approach from lenders would be encouraging enough in normal times. But these aren’t normal times, with the clear expectation that there are some future headwinds.

There are plenty of borrowers whose finances have been somewhat tested over the last 12 months.

Some will have raised debt to keep their heads above water, and with the prospect of more job losses ahead, there’ll unfortunately be a rising number of homeowners in a similar position in the months to come.

For these borrowers, the prospect of cutting the cost of those debt repayments by consolidating those loans through a second-charge mortgage will be incredibly attractive.

That’s a whole swathe of new borrowers for whom a second-charge mortgage may be the most suitable option.

It’s not just borrowers who have had financial difficulties though. We’ve all spent far more time than usual at home over the past 12 months, and there have been an awful lot of conversations across the country about how we could adjust our homes to better meet our new circumstances, particularly for those who are going to be working at home for at least part of the week for the foreseeable future.

Significant numbers of those homeowners won’t want to disturb their existing mortgage, and incur ERCs that come from remortgaging for a higher amount, but have sufficient equity built up in their property, that a second-charge mortgage can adequately access to raise sufficient funds to pay for their intended home improvement project.

Hoyle said that the FLA expects to see a “strong rebound” in the second-charge market over the next year, but frankly I think that may be underplaying it.

The number of people for whom a second-charge loan could help is only going to increase, and this, coupled with a positive approach from the industry’s lenders provides the prospect of promising times ahead for seconds.

By Barney Drake

Source: Mortgage Introducer

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Brokers have been increasingly searching the second charge market

Mortgage brokers have been increasingly searching the second charge market for loans to help customers raise capital in March, Knowledge Bank said.

Three of the top five most-searched second charge criteria terms featured “capital raising” during the month.

The most searched for term in the sector was “maximum loan to value (LTV)”.

However, capital was sought for purchasing buy-to-let (BTL) property, followed by home improvements, then debt consolidation.

In the residential segment, “furloughed workers,” topped the searches for the third month in a row, followed by “maximum age at end of term”.

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“First-time landlord,” ranked first in BTL, then “lending to limited companies.”

Matthew Corker, operations director at Knowledge Bank (pictured), said the pattern of searches “demonstrate the economic divide in the UK at the moment.”

“Some have increased savings through lockdown and are using a larger deposit either to invest in property or add to their existing home. Others have been hit hard, losing their job or being put on furlough,” he said.

“Lenders continue to adapt criteria to keep up with the evolving market,” Corker added.

Source: Mortgage Solutions

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Second Charge lending up 31% in March

Second charge lending totalled £91.4 million in March 2021, a 31.27% increase on the previous month.

The number of completions also topped 2,000 for the first time since the pandemic began, with 2,202 second charge loans funded in March 2021.

The increase in the number of high LTV mortgage products returning to the market in recent months seems to have started to impact the second charge market, with a decrease of 4.18% being recorded for loans over 85% LTV.

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The increase is also significant when you compare year-on-year, with March 2021 just 1.72% below the figures posted in March 2020 – just a 1.5 million difference.

The average completion time shows the industry is well-positioned for growth: despite the monthly second charge lending increasing by 21.8 million, there was just a single day increase in completion time.

Source: Mortgage Finance Gazette

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Risks to UK Economy Remain Tilted to the Downside

Bank of England Governor Andrew Bailey said risks to the UK economy remain tilted to the downside, a remark that may rein in expectations that policy makers may soon shift toward containing inflation.

Bailey reiterated the bank’s guidance that it doesn’t intend to tighten monetary policy until there’s clear evidence the UK economy is absorbing excess capacity, and he noted that unemployment is likely to rise and remain higher a year from now. For those reasons, risks are “on balance distributed on the downside, though less so as time goes by.”

“There is a growing sense of economic optimism in markets and in consumer and business measures,” Bailey said in the text of a speech to the Resolution Foundation on Monday. “A note of realism though. Our latest forecast painted a picture of an economy that starts at a lower level of activity.”

The speech follows a sharp rise in U.K. interest rates in financial markets over the past month as Prime Minister Boris Johnson’s campaign to rapidly vaccinate the population from the coronavirus took hold. With the government working to loosen a nationwide lockdown, investors are starting to anticipate when the central bank might shift from supporting the recovery to controlling its strength.

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Bailey noted inflation remains below the bank’s 2% target and that before any more “there is a burden of proof we will need on the sustainability of the recovery.”

While the U.K. labor market has adjusted relatively quickly to economic shocks previously, the rise in unemployment was likely to be higher in a year partly because the worst-hit sectors are dominated by younger and lower-skilled workers who may find it harder to find new jobs, he said.

The furlough program, which pays 80% of wages to people whose workplace has closed due to the virus, “will help to preserve viable employment going forwards, and skills specific to particular jobs or companies, which is a good thing,” Bailey said, after Chancellor of the Exchequer Rishi Sunak extended the program until September in his budget last week.

“My expectation would be that this is likely to reduce the peak level of unemployment over the coming months,” Bailey said. “However, some rise in unemployment as the scheme tapers will be hard to avoid.”

By Lizzy Burden and Andrew Atkinson

Source: Bloomberg

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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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