November 8, 2018
When customers wish to borrow additional capital against their property equity, they will inevitably look to you for a rundown of possible options. And while refinancing their existing First mortgage may seem like the obvious way forward, it’s not always a comfortable fit for a borrower, especially if it would require tearing up an existing, highly-attractive tracker or fixed-rate deal.
This is why it’s important to weigh up traditional further advance options alongside the possibility of a Second Charge mortgage: an additional, secured loan from a separate lender to the primary charge, that essentially sits on top of the borrower’s existing mortgage.
To help you become better equipped to spot the best fit for your customers, and to add value to your service offering, here we’ll give you a need-to-know rundown of the differences between these two types of arrangements:
A significant change for Second Charges occurred in 2016 with the arrival of the Mortgage Credit Directive (MCD). Prior to this, Second Charges were separately regulated under consumer credit rules. The new law means that First and Second Charges are now governed under the same regulatory framework — and that all second charge lenders and brokers must be authorised by the Financial Conduct Authority.
In terms of your service offerings, you need to be aware of the following:
Bear in mind that most customers would much prefer to explore the possibility of a further advance or a Second Charge via a side-by-side comparison (as opposed to having to approach two separate brokers). This is a strong argument in favour of including both as part of your range, with a view to extending the value of your service offering.
The requirement to alter existing mortgage arrangements
A Second Charge is a distinct loan, whereas a further advance involves changing the terms of the customer’s existing arrangement. So, when considering the viability of each options, you should always look closely at just how far the terms of the existing loan would need to be altered to meet the customer’s aims — and at the acceptability of those changes in the customer’s mind.
It’s worth remembering, however, that there are still some high street lenders who do not allow further advances. Others have relatively strict minimum requirements, e.g. the mortgage must have been in place for at least six months before the request can be considered. Many also require what is essentially a re-run of the initial application process, complete with credit checks and full affordability assessments. There is plenty of scope here for customers to fall foul of the lender’s eligibility criteria.
More widely, when a customer approaches their existing lender for a further advance, the response can often be along the lines of, “Yes, we can accommodate the request — but only if you agree to an altered set of terms.” The customer might, for example, be quite happily locked into a historic lifetime tracker mortgage with an amazing rate, a fixed-rate deal that they are entirely happy with — or an interest-only arrangement. Accepting a further advance can mean having to forego these beneficial arrangements.
If your customer takes out a Second Charge, they will likely pay a higher interest rate on that additional loan compared to the amount they are currently paying on their First Charge. However, once they factor in any early redemption charges, along with possibly higher interest rates payable under the new arrangement if they went down the further advance route, a second charge may make much better sense.
Just like a First mortgage, an application for a Second Charge is still subject to affordability checks and stress testing. For further advances, typical borrowing limits are along the lines of a 4.5 earnings ratio, with many sources of income (such as tax credits and irregular secondary sources of self-employed earnings) routinely discounted from the equation.
With Second Charges, however, eligibility criteria tend to be less stringent. You should find earnings ratios in the region of 6.0, with fewer limitations on the categories of income considered. This is worth bearing in mind for customers whose financial circumstances may have changed since the time of the initial mortgage application.
Further advances from traditional high street lenders require an advised sale. As a broker, you will need to arrange the necessary conversation between your customer and the lender — and it is not unusual for it to take up to six weeks for this to be scheduled.
Timescales for arranging a Second Charge are generally quicker — here at Enterprise, for instance, the average turnaround for finalising a Second Charge is around four weeks, and it is not unusual for us to have it in place within a matter of days.