Second-charge loans are growing rapidly in popularity. Many mortgage advisers are finding that the second charge route is more favourable for their clients when compared with remortgaging or a further advance on their existing home loan – or even a personal loan.
In the past, there has been a general lack of understanding and misconceptions about second charge loans. In fact, it is fair to say that, to date, this sector of the market has suffered from a somewhat downmarket image.
However, all this seems to be changing as reputable lenders are starting to offer some good products and many mortgage advisers are starting to see the second charge route as a viable alternative.
A second charge is registered when an alternative lender provides a further secured loan on a property that is already mortgaged.
It is not the same as a remortgage product, where a borrower can take an alternative mortgage product, or a further advance, where the existing mortgage lender tops up the borrower's mortgage.
A second charge can be seen in terms of a secured loan with the monies secured on the property.
When the borrower is looking for smaller amounts of money, the difficulty for the broker can be deciding the best route to choose between second charge and a further advance from the existing mortgage lender.
The best advice obviously is to compare as many options as possible for the client, focusing closely on the interest rate charged, any hidden costs and any penalty that may be incurred for early redemption.
A further advance will mean that the current mortgage lender releases additional funds under the original mortgage contract. However, if the terms have changed then a new contract may need to be signed.
A further advance will also require new underwriting checks to ensure that the borrower's current circumstances are still compatible with the lending criteria.
If the borrower has experienced a change to their circumstances since obtaining the original mortgage (for example, a high increase in unsecured debt, becoming self-employed or a change in employment status), they may not actually qualify for a further advance with their existing lender.
There is also the issue of the existing lender not wanting to advance the money for the purpose for which the loan is required, such as debt consolidation. In these circumstances, a second charge loan may provide the most suitable alternative.
The other available option for the borrower to enable them to release capital is to remortgage the property. Remortgaging has become increasingly popular over recent years. The latest statistics from the Council of Mortgage Lenders show that in April 2001, remortgages accounted for £3.8bn.
Remortgaging is obviously a viable option for many borrowers. Considerations must be made, however, about incurring unacceptable redemption fees. There will also be more general administration fees associated with remortgaging to add to any cost calculations.
Unlike first mortgages, there are no costs incurred by the borrower such as valuation, legal or administration fees with a second charge. Applications can be progressed very quickly, often on a one-page form with straightforward underwriting procedures.
Typically, second charge loans will carry a higher interest rate than first mortgages, with rates usually starting from 8.9 per cent APR. These are still lower than other rates charged on personal loans, for example.
The amount of the second charge loan is not decided on the traditional mortgage calculation of income multiples but rather the borrower's ability to repay the loan.
There are also more flexible plans available for self-employed borrowers who may have difficulty proving their income.
This method of calculating the ability to repay means many borrowers will be able to borrow more than they might if they had tried to remortgage or obtain a further advance.
Loans can vary considerably in size, between £3,000 and £50,000, although bigger amounts are available depending on the individual circumstances.
Loans are regulated by the Consumer Credit Act up to £25,000 but are non-regulated above that amount.
Similar to remortgaging and personal loans, second charges tend to be used to help fund things such as home improvements. They are also available for debt consolidation or capital raising for business purposes or to raise capital to help with the purchase of a property overseas, for example.
Although second charge is growing in popularity, only a handful of lenders offer the facility. Specialist lenders include Cedar Holdings, First Plus, Endeavour Personal Finance, First National Bank, Igroup, Paragon Finance and Swift Securities. However, as more lenders see the opportunities in this sector of the market, this list will no doubt grow rapidly.
For brokers, there is the opportunity to earn a commission from the sale of second charge loans – usually a figure taken from a percentage of the net loan value. Roughly speaking, fees can start from about 0.5 per cent upwards of the loan size.
The average market loan for second charge is £15,000 and, although difficult to provide precise industry figures, the second charge market is around £500m a month and is growing fast.
The future for second charge is looking very bright indeed. An increasing number of lenders are expressing an interest in this sector of the market and, as competition continues to grow, we will see much more in terms of product innovation and competitive pricing.
At present, there is still a regulation issue over second charge loans – with loans over £25,000 not being covered by any form of statutory regime an issue which has been identified by the Council of Mortgage Lenders.
There is a huge appetite in the current climate for personal credit, in all kinds of forms. In a very competitive market, second charge loans can continue to flourish as they continue to be a cost-effective method of personal credit, offering a suitable alternative to both personal loans and remortgaging.