What are Second Charge mortgages?

With over £1.2 billion in annualised lending and over 27,000 Second charge mortgages in the 12 months to October 2019 (FLA), the Second Charge market can no longer be considered a niche in the specialist finance sector.

Borne out of the ‘secured loans’ of the past, the Second Charge mortgage market has transformed since 2016, following regulation imposed by the FCA’s Mortgage Credit Directive. The specialist finance sector embraced this transformation, as Second Charge mortgages became subject to the same Mortgage Conduct of Business rules (MCOB) and regulations that apply to First Charge mortgages.

In this post, we’ll define Second Charge mortgages, why they’re important for any mortgage broker and provide 5 best practices for getting started with Second Charge mortgages in your company.

What are Second Charge mortgages?

Second Charge mortgages are loans taken out against equity in an owned property. The lender uses this equity as the security, enabling the borrower to raise funds. Because the Second Charge mortgage lender is behind the First should the property be repossessed, the lender takes on more risk, and therefore charges a higher interest rate than you’d see on First Charge mortgages.

Why are Second Charge mortgages important?

Brokers who do not consider Second Charge mortgages when it is appropriate to do so, are in contravention of MCD regulation. This is particularly the case for Directly Authorised brokers who applied to the FCA to add Second Charge permissions to existing First Charge permissions in their scope of services.

And now they are a more mainstream alternative, mortgage intermediaries may recommend Second Charge mortgages to their clients if they are in need of finance where a remortgage, further advance or unsecured lending would be detrimental.

But it’s not just about adherence to regulations. It’s always about delivering the best solution to the customer. If brokers are familiar with and understand the role Second Charge mortgages can play for their clients – then the benefits will naturally become clear. Here is a very high-level overview of these benefits:

• Delivers an alternative secured source of funding where a first charge option simply isn’t appropriate. For example, their circumstances may have changed (e.g. employment status, credit history, salary) since they took out their first mortgage, and they are now struggling to secure additional lending.
• Perhaps they need funds in 4 to 6 weeks, and they couldn’t access funds this fast with a First Charge or remortgage.
• Less costly (in some cases). In some situations, a Second Charge may prove less costly if they enable the borrower to avoid hefty ERCs on their First Charge, or jeopardising a competitive interest rate on their first charge if they were to remortgage.
• Second Charge mortgages can be used for any legal purpose, including home improvements, debt consolidation, tax bills, even raising funds for a mortgage deposit.

Recent figures from the Finance & Leasing Association (FLA) support the rising adoption of Second Charge mortgages as a financial solution.

[graphic] Increased 20% in volume of mortgages 18% in value on previous year (to Sep 2019)

[graphic] The rate of Second Charge mortgage repossessions (as a percentage of outstanding agreements) was 0.06% in the twelve months to September 2019.

5 tips for brokers when approaching Second Charge mortgages

1. Be familiar with Second Charge mortgages, how they work and situations in which you might recommend them
2. From this, make a note of opportunities to spot them as a solution for your clients
3. Talk to other brokers or explore case studies to understand how other brokers have used Second Charges
4. Learn how to place Second Charge mortgages / the process
5. Explore areas of the process you may be able to outsource

Takeaway

Whether you’re a new broker, new to Second Charge mortgages or you know all about them but are yet to place a case – remember it’s imperative you consider Second Charge mortgages when it is appropriate to do so. But, with the same rules and regulations as First Charge mortgages, they shouldn’t be a burden on you to place. Despite growth of the market increasing year-on-year, repossession rates were reported at a low of 0.06% in 2019 (up to Sep 2019) – pointing to an increasing professional placement of these mortgages by brokers who recognise them as an ideal solution for their client.

So, could you be missing out on Second Charge mortgages in your broker toolkit?

Get started with Second Charge mortgages right away - download the free broker’s essential guide to Second Charge mortgages.

For a quick chat, a meeting to discuss opportunities, or a more complicated deal on your desk – drop us a line or give us a call today on 020 8731 5333.