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Broker Video Guide to Second Charge Mortgages

September 20, 2016

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Hello, and welcome to Enterprise Finance’s introductory guide to second charge mortgages. I’m Paul Huxter, Head of Sales for Enterprise, and I’ll be taking you through what second charges are, how they work and when they can help your clients.

First, a quick introduction to Enterprise.We’re a long-established Specialist Finance Distributor, focused on all forms of specialist secured property lending, from second charges to commercial mortgages. We’re the UK market leader for second charges fully-supporting brokers and have relationships with most mortgage broking networks.That’s why, today, I’m talking about second charges.

So let’s look at how second charge mortgages – what used to be known as secured loans – work, to release property equity.

Consider a homeowner with a £530,000 property that has a first charge mortgage of £240,000.

Let’s say they need another £60,000. They have first charge options to release equity to do that.

A further advance on their existing mortgage, taking it to £300,000...

...or remortgaging for the same.

They can also take a second charge mortgage, just for the £60,000 and leave their original mortgage untouched.

In all 3 cases, the aggregate Loan-to-Value is 57%So, 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 1st charge, for example they’re self-employed and their lender has tightened lending criteria since they got their first mortgage. Or it could be something as simple as needing the money more quickly than a 1st charge can be arranged.

Alternatively, the nature of their existing 1st charge may prevent change – either because they’re on an Interest Only deal, and would have to change to a Repayment mortgage that they can’t do, or there are major exit penalties.

In both cases, simply adding a 2nd charge - often with more flexible underwriting - leaves the 1st unaffected, so that it doesn’t fall foul of these challenges.

That could be because the borrower’s circumstances don’t permit a bigger 1st charge, for example they’re self-employed and their lender has tightened lending criteria since they got their first mortgage. Or it could be something as simple as needing the money more quickly than a 1st charge can be arranged.

Alternatively, the nature of their existing 1st charge may prevent change – for example, because they’re on Interest Only and would have to change to a Repayment mortgage, that they can’t afford to do.

In both cases, simply adding a 2nd charge, often with more flexible underwriting, leaves the 1st unaffected, so that it doesn’t fall foul of these challenges.

A less obvious, yet almost more critical time to consider 2nd charges is when your client has a great deal today.

Consider a situation where a client has been in a good 5 year fixed deal at just over 2% on their 67% LTV first charge. They have 36 months remaining on their deal and a 4% ERC.

They need to borrow £40,000 for some debt consolidation and a new car.

To remortgage onto an equivalent, new 5 year mortgage at 75% LTV would get them 2.34%.

An alternative option is to keep the low-rate 1st charge and add a 2nd charge. This would be a higher interest rate on the additional £40,000 – 6.25%.

We can see that the additional monthly cost is lower on the remortgage

When we multiply that up to the remaining 36 months of their existing deal, the remortgage option works out cheaper on monthly costs by around £1,500.

But the 4% ERC would trigger a whopping £15,000 additional upfront exit charge to the client, compared with around £2,000 arrangement fees for the 2nd charge mortgage.

So, when all costs are considered, the 2nd charge works out less costly.Clearly, in cases like these, the 2nd charge option would likely be best for the client, so it’s important to compare the two.

Given how useful 2nd charges can be, as valid alternatives to 1st charge options, it isn’t surprising that they have moved to the same regulatory basis.The MCD means 1st and 2nd charge residential mortgages are regulated by the FCA under MCOB rules.That change brought with it some important requirements for brokers. Whilst the MCD is a whole story in its own right, it’s worth noting the following.

Even if you don’t have 2nd charge permissions, you have – at absolute minimum – to tell clients that the option exists and that it may be better for them. You don’t have to do so, but you can refer to someone like Enterprise, who can advise the client about the 2nd charge. However, you may no longer use Independent or Whole of Market in any literature or even your company name, as 2nd charge are now considered part of the same “market” as 1st chargeIf you do have 2nd charge, you have to assess that option and document the evidence why that’s the right thing to do, or if you consider it the wrong option, why it isn’t the best way to meet client needs.

Again, you can use a specialist like Enterprise, who can package the deal with our comprehensive panel of specialist lenders on your behalf. Helpful, as you may not be able to access those lenders directly.

Something we often hear about second charges or secured loans is that they’re ‘only for sub-prime’.That’s a bit of a myth. Whilst lenders will look at credit-impaired borrowers, the majority we deal with are actually prime credit risk. The examples we’ve looked at so far are based on Enterprise’s experience, with average 2nd charges that we placed in 2015 being £61,000 at a low 56% total LTV.More often than not, its prime borrowers whose circumstances are just a little different than the high street has become willing to lend to, post-recession, or those who have some degree of lock-in to their 1st charge, precluding 1st charge optionsMoreover, whilst debt consolidation continues to be a significant use of 2nd charges, the funds are actually being used for a whole range of applications, right up to financing startups and paying for school fees.

Given the importance of debt consolidation, let’s look at a recent case we dealt with at Enterprise. Our client had significant unsecured debt, costing £682.50 a month.

They had a £225,000 mortgage and went to their prime lender for a further advance.

Unfortunately, some poor conduct on their unsecured debt account led to decline.

Instead, we were able to place a 2nd charge for £20,000 at £217.38.

Securing their debt against household equity cut their outgoings by over £450 each month, with no upfront costs. And with only a 1 month ERC, they’re not heavily tied in, should a future 1st charge option come around.

Given the importance of debt consolidation, let’s look at a recent case we dealt with at Enterprise. Our client had significant unsecured debt, costing £682.50 a month.

They had a £225,000 mortgage and went to their prime lender for a further advance.

Unfortunately, some poor conduct on their unsecured debt account led to decline.

Instead, we were able to place a 2nd charge for £20,000 at £217.38.

Securing their debt against household equity cut their outgoings by over £450 each month, with no upfront costs. And with only a 1 month ERC, they’re not heavily tied in, should a future 1st charge option come around.

Enterprise’s comprehensive panel of lenders, with whom we have longstanding relationships, gives us access to a wide range of second charges.

LTVs range from 95% for regular home borrowers...

With a range of rate options, starting at 4.5%...

...And broad accommodation of client circumstances......there’s likely to be an option to fit your clients’ more complex needs.

In summary, then, 2nd charges are becoming increasingly mainstream as alternative equity release options, which the regulator requires to be considered.When your client’s situation rules out 1st charges, why not give us a call or log into our Apex broker portal to look at the 2nd charge alternatives? Click here if you’d like more information.