We have recently been hosting a series of webinars on Second Charge Mortgages and how to arrange them. To get a real understanding of how we could help, we decided to ask our attendees what their biggest challenges actually were with placing second charge mortgages.
These were the six most common challenges we identified:
1. The absolute basics
2. When to use a second charge
3. Placing a second charge
4. Positioning to clients
5. Fees
6. Compliance
1. The absolute basics
“I have never done second charges before.”
The unknown is always a little daunting. So, if you have no experience with placing second charge mortgages and have no idea where to begin – you’re not alone. This is something we hear regularly and it’s clear that there are plenty of brokers out there starting from scratch. The biggest challenge for many is actually when to introduce second charges. Also, for those completely new to broking in general, just learning first charge mortgages is already enough to think about – let alone getting to grips with second charges.
You may have also been a little put off from learning the basics, if all you’ve heard are negative things about second charges. Previously known as ‘Secured Loans’, second charges no longer live up to their reputation as a high-risk, high-rate and heavily sub-prime option, with a side of PPI mis-selling. Second charges actually offer competitive rates at a small premium to first charges, prudent lending with LTVs averaging 59%, with full affordability and income verification. And they are fully transparent, MCOB regulated, with clear terms aiming to treat customers fairly.
Second charges are used by a variety of mainstream borrowers, for a variety of reasons such as debt consolidation, home improvements, tax debts clearance, 2nd property deposits, school fee payments or business financing. This includes borrowers who are:
- Prime credit with equity in their properties
- £61,347 @ 56% LTV average second charge loan
- …behind a £241,313 average 1st charge
- Credit-impaired
- Self-employed
- ‘Stuck’ in their 1st charge
2. When to use a second charge
“Not knowing how to do this or when it is appropriate. I might be missing opportunities.”
This is the most regular feedback we received – knowing when a second charge could be suitable as a capital-raising alternative to first charge options, and when they may be missing opportunities.
For experienced brokers, you will likely remember when second charge mortgages became FCA regulated as part of the implementation of the Mortgage Credit Directive (MCD) in 2016, and we’re sure you’ll agree this has improved awareness of the second charge mortgage proposition across the mortgage broking community.
'Second Charge’ search term on Google Trends from October 2012 to October 2017.
In principal, the MCD means mortgage advisers like yourselves have a duty to consider second charges in situations where it may prove the best option for your client.
But it’s not easy if you’re not sure how they work and when they are right for the client. So the awareness may be there, but why and when to use them is a completely different story.
In our first stage of the introductory Second Charge webinar, we start with answering ‘When would you look at a second charge over the first charge options?’
Well the most obvious situations are ones where a first charge option simply isn’t an option.
That could be because the borrower’s circumstances don’t permit a bigger first charge. For example, they’re self-employed and their lender has tightened lending criteria since they got their first mortgage. Or maybe they’re credit impaired, at salary multiple limit – or need funds in 4 to 6 weeks.
But there are also situations where a second charge may prove less costly than a remortgage, such as substantial ERCs on their existing first charge, or if their first charge is a really good deal that wouldn’t be available if remortgaged.
3. Placing a second charge
“Processing and who to place a case with.”
Sometimes just knowing the key steps makes it easier to approach doing your first second charge. Here we will illustrate how to place a second charge by working in partnership with a Specialist Finance Distributor like Enterprise.
1st stage – Client enquiry for raising capital
This stage is entirely in your hands:
- Listen to your client’s capital-raising enquiry
- Review first and second charge options
- If you decide the second charge option is most suitable, inform them they are being referred to Enterprise Finance who are Specialist Finance Distributor (SFD)
- Refer to your chosen SFD - Enterprise Finance
2nd stage- Advising stage: initial contact
At this point Enterprise Finance typically work directly with your client to take them through the advice process, for identifying the best second charge product on the market – still keeping you in the loop as much you want. Steps include;
- Initial suitability assessment
- Indicative terms
3rd stage- Advising stage: fact-find & sourcing
- Conduct fact-find with client
- Client supplies second charge specific information
- Reassess case based on full information
- Source and recommend best fit product
- Recommended product terms to client
4th stage- Packaging stage: processing
- Sending paperwork with ESIS and checklist of supporting docs to client
- Reviewing returned paperwork with support documents
- Instructing valuation and getting first charge consent
5th stage: Packaging stage: submission
- Package case and submit to lender
- Reviews and underwrites case
- Assessing and receiving any additional requirements and information
- Conducts security call and confirms security details.
Final stage: Completion stage
- Preparing and receiving signed binding offer from the client
- Forwarding the signed offer to the lender
- Confirmation of completion
- Client receives funds
- Introducer fee paid to you within 48 hours (and network if appropriate)
So, to summarise working with a Specialist Lending Distributor means they do a lot of the heavy lifting for you, once you’ve done the primary advice and made the initial referral. If you take a little bit of time upfront to prepare your client before referral, that gives you three key benefits – less client hassle, easier for you, faster completions.
4. Positioning to clients
“Getting clients to understand the benefits of a 2nd charge.”
This is, to a certain extent, a challenge that can be solved by getting a full grasp of factors 2 and 3 above – how a second charge can meet your client’s needs (better) and what the client can expect as an experience when they go through the process of getting one.
However, added to that is the fact that clients are almost always less experienced with financial products in any form. It’s harder to explain a second charge mortgage to someone who doesn’t even know what a charge is.
In order to alleviate any fears or worries, it’s also highly recommended to be clear and transparent about the process to improve the chances of it actually being the smooth experience you suggest it will be. Our top-tips always include;
- Setting your clients expectations of the involved costs, fees and charges
- Setting client expectations of documentation required
- Explain the importance of transparency from the client
- Explain the importance of completeness of information
- Getting consent for credit-checks upfront and to share the client’s personal data with Enterprise Finance. Unlike a first charge, second charges use soft credit checks, only leaving a hard mark at completion stage. This is done at full application stage by the lender. Enterprise Finance will do a soft credit search which doesn’t leave a footprint at initial stages. The hard search will be completed at application stage and will show on the CRA whether the loan completes or not.
- Sharing fact-finds with Enterprise Finance if available, to avoid repetitive questions for your client.
A second charge, if suitable for your client, should solve their needs. But you should be able to explain this in plain English.
5. Fees
“Higher rates than first charges and high fees.”
This is a frequently raised barrier. The reality is that both fees and interest rates have fallen dramatically in the second charge world, especially post-MCD. Nevertheless, it is important to explain that, as these loans are secured on a second charge, with lower legal priority than a conventional first charge, they will carry higher interest commensurate with the higher risk that lenders are taking. Further, we also explain that many Specialist Finance Distributors give the option for clients not to pay charges such as valuation fees upfront, unlike the first charge world.
6. Compliance
“The Paperwork Trail.”
This is always something of a challenge across the regulated mortgage world. Enterprise’s response to this has been to build into our IT systems both process workflows, and system generated and recorded paper trails for searches, sourcing and placement, to aim for a complete-first-time approach to Compliance. In addition, our message to you is that second charges are regulated under the same regime as first charge mortgages, so the paperwork requirements are similar– there isn’t necessarily anything new or different to learn, in order to participate in the marketplace. Moreover, where Enterprise is providing the advice on any case, we take responsibility for getting the compliance right, and make it easy for you.
Although these relatively basic themes still exist as challenges in the market-place, it’s encouraging to know that the educational programme we are pursuing is addressing the challenges that brokers are feeling, and we realise that education is both an ongoing and a long-term process to which we remain committed.
To learn more about second charges watch our free videos:
For more information, give us a quick call on 020 8731 5333 or drop us a line.
