Property Finance Options - 3. Second charge lending (secured loans)
As the MCD (mortgage credit directive) has now been implemented it seems fitting to write a piece on Second charge lending and how things have changed for this industry.
The first thing I noticed was a number of second charge lenders winding up their business's altogether. The heightened regulation in this area has seem to put a big dent in the market. I am only assuming this can be that the cost of running these business's have increase whilst the scope for new lending and profit has decreased. The reason it has decreased is because the affordability assessment has heightened, basically meaning it has become very similar to normal residential mortgage affordability testing. Where before the affordability assessment was a bit more relaxed and people maxed on their mortgage borrowing could potentially go to a second charge lender and borrow more money.
Although there is still a massive place in the market for this type of borrowing and I believe it can be a massive help to people. Generally it will be more expensive than first charge mortgage lending, and this is for the simple reason of risk to the lender. If all goes wrong and the borrowers financial position does not allow them to keep up with payments and the property is repossessed then the second charge lender is second in line to claim there money back. So you will be looking at rates from 4% - 15% depending on your current personal situation. This will vary case by case and pricing will be based on a number of factors such as LTV, credit rating, income and overall risk to the lender.
There are a number of ways the lending can be used, these include -
- Raising a deposit or cash property purchases
- Raising funds for business investment
- Home improvements
- Debt consolidation
- School/university fees
- Car purchases
- Tax bills
So why would you want to borrow on a second charge if it is more expensive than a normal mortgage and the affordability assessment is very similar? Sometimes you may be in a position where it works out financially cheaper, or you have no other options. For example, we recently completed on a £50k second charge for one of our clients. They had a large amount of unsecured debt compared to their income, which stopped them fitting affordability when trying to raise the extra funds on a normal mortgage to pay down the debt on a consolidation. A lot of lenders also have a maximum debt to income ratio, which means if your unsecured debt is a certain percentage of your overall income then it will be an instant decline. So their current monthly payments to the debts was extremely high, getting unmanageable and they was unable to raise the money on the mortgage because of the debt to income ratio being too high. This is where the second charge lending came in to assist, as we managed to consolidate all debts, making their monthly payments on this debt go from £900 a month to £400 a month allowing the customer to afford their debt and lifestyle. What we then did was a rate switch at their current lender to reduce their residential mortgage payment as well (no underwriting assessment was needed to do this). In two years time when this mortgage finishes we will then consolidate the second charge debt on to the mortgage. The lenders will have a different outlook to the debt as it will then be secured and we will then be able to reduce the interest rate of this debt even further for them.
There would be numerous situations where a second charge would be more beneficial to the client but it seems this type of borrowing is over looked massively by a lot of brokers. The reason for this is as a mortgage broker you need a separate license to be able to offer advice on second charge lending direct to lenders. This then leads to brokers having to create relationships with Master Brokers that have access to this product, which then means passing there client to another advisor for the advice. A lot of people find it hard to trust other people with their clients I find, so then this option gets overlooked massively. This then becomes detrimental to the clients financial situation.
If you have any questions or would like any more information on how a Second Charge Loan Could be beneficial to you then please get in touch. James@Mesafc.co.uk .
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