Unless you are new to lending, you will be incredibly well versed (we hope) in the upcoming regulatory changes that will see second charge mortgages come under the same FCA regulation as first charge mortgages.
The implementation of the Mortgage Credit Directive in March will raise the awareness of seconds, which were traditionally overlooked, as brokers will now be obliged to disclose that a second charge mortgage could be the more appropriate lending option for a client who is seeking to increase his or her borrowing.
The industry has been talking about these changes a lot over the past year, but the customers who could potentially benefit from this type of lending have been around even longer. So, instead of worrying about the theory behind MCD, the real question is: how can brokers spot a second charge customer who would benefit from this type of lending and offer the best advice?
- Interest only mortgage customers
For some consumers, staying on their existing interest-only mortgages is the best option for them. However, many believe that the only way to obtain further credit is by switching their current mortgage to a repayment option. For many, this would make their monthly repayments rise dramatically, making it unaffordable. By comparison, a second charge mortgage will allow the customer to borrow additional money without interfering with their existing mortgage.
- Lifetime tracker customers
With interest rates at a historically low 0.5% and speculation about a rate rise and most recently a rate drop now common, some customers on a lifetime tracker will want to raise funds. Many may find that it’s not possible to remortgage to equivalent or lower rates. For these customers, a second charge loan should be considered, as it will sit behind the customer’s existing first charge mortgage, with minimal exit fees or changes to terms and conditions.
Second charge loans will also benefit customers still on trackers taken out prior to the financial crash, as finding the same base rate would be rare in 2016, thus making their monthly repayments too expensive. Seconds would allow customers to borrow the extra money they need at a fairer rate.
- Fixed rate customers
A fixed rate mortgage will almost always carry early repayment charges that can cost customers thousands of pounds in fees if they choose to opt out before the initial product term has ended. Moreover, some may find that it’s not possible to remortgage to equivalent or lower rates. For these customers, a second charge loan should be considered, as it will sit behind the customer’s existing first charge mortgage, with minimal exit fees or changes to terms and conditions.
- Customers who want to consolidate over £30k
Many people currently owe money on more than one credit card or have several different credit agreements or loans in place. This can make keeping track of them all very difficult and could lead to serious consequences if a payment is missed. Streamlining debt obligations can take a lot of the hassle out of managing a client’s money, but it has become increasingly difficult to source consolidation loans over £30,000 on the high street.
Second charge loans not only allow the customer to consolidate debts over a longer term than an unsecured loan, but also give them the flexibility to have a shorter term than their first charge mortgage whilst reducing their monthly outgoings, which allows them to budget better.
- Self-employed customers and victims of circumstance
If a customer has recently become self-employed, he or she could be eligible for a second charge mortgage. This is great news for customers who have had their applications for other types of mortgage loans rejected due to lenders needing extensive proof of income. With second charge loans, lenders will take into account all of the customer’s income, including buy-to-let rental yield and foster care along with many other benefits. Customers will also be eligible for seconds with just six months proof of self-employment and projected income figures from a qualified accountant.
Second charge mortgages can help a variety of customers, from those who have fallen victim to circumstance such as divorce or redundancy and need to build their credit profile, to those hoping to raise more finance than what would typically be available from other personal loans or high street lenders. There are a rising number of consumers being left as ‘mortgage prisoners’ trapped on very high interest rates and unable to borrow as lenders continue to tighten their lending criteria. It may be that second charge loans could enable them to source funds which were previously unavailable.
Intermediaries who are currently dealing with first charge mortgages are in a strong position to start working with seconds as well; they simply need to identify which of their clients could benefit from this type of lending.
Second charge lenders and brokers have been able to apply for mortgage permissions since 2014, so it is essential that everyone in this sector is familiar with secured loans and the regulation around these options. However, it is vital that we don’t get lost in regulation and forget the customers who we could be helping. As the MCD steadily becomes implemented, we will see the second charge market continue to develop and blend even further into the mainstream mortgage market. This shift will not only underpin the future growth of the market, but will also ensure that customers are better informed and protected.
Nicola Mooney is head of secured, intermediary and business finance at Freedom Finance