MORTGAGE holders may be able to take advantage of what’s known as either second charge or second mortgages. These are a secured loan taken out against a borrower’s home which are often utilised to raise money instead of remortgaging and new statistics on business volumes has shown how lenders are handling these types of products.
For August 2020, the number of new second charge mortgage agreements reached 1,134.
While this is a drop of 52 percent when compared to the same period last year, Fiona Hoyle, the Head of Consumer and Mortgage Finance at the FLA remained optimistic: “While the second charge mortgage market remains subdued compared with pre-crisis levels, it is encouraging to see the number of new mortgages increase month-on-month since the record-low in May.
“Lenders are continuing to do all they can to support customers during this challenging period and customers experiencing payment difficulties should contact their lender as soon as possible.”
Second charge mortgages can provide loans of anything from £1,000 upwards.
They’ll allow people to use any equity (cash) built up in a home as security against another loan, which will mean they’ll have two mortgages on their property.
According to the Money Advice Service, lenders have to comply with strict rules governing these products when evaluating customers.
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This means lenders will have to produce affordability and stress tests on borrower’s financial circumstances when they apply and the borrower’s will also have to provide evidence that they can afford the loan.
The following are reasons why a person may consider taking out a second charge mortgage:
- They’re struggling to get some form of unsecured borrowing, such as a personal loan, perhaps because they’re self-employed
- If their credit rating has gone down since taking out their first mortgage, remortgaging could mean they end up paying more interest on their entire mortgage. A second mortgage means extra interest is just added onto the new amount they want to borrow
- If their mortgage has a high early repayment charge, it might be cheaper for them to take out a second charge mortgage rather than to remortgage
While second charge mortgages can be beneficial, it should be remembered that they can also have costly downsides.
It is unadvisable to utilise this option if a person is only just managing to keep on top of their regular mortgage.
They could end up losing their homes if they cannot keep up with repayment on either their mortgage or the second charge mortgage.
Indeed, according to the FCA, 447 properties were repossessed by second charge lenders in 2014.
Additionally, consumers may want to reconsider their options if they’re looking to use a second charge mortgage to consolidate or cover exiting debts.
Second charge mortgages can run for up to 25 years, meaning if they’re used to pay off smaller debts such as credit card bills, more interest may be paid in the long term.
Also, if unsecured credit debts are converted into a secured credit product such as this one, is could increase the risk of repossession.
By CONNOR COOMBE-WHITLOCK
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