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SECOND CHARGE WATCH: BUY-TO-LET AND EQUITABLE CHARGES

By Darren Perry, Head of Second Charge Mortgages at Brightstar Financial

The second charge mortgage market is evolving quickly, particularly when it comes to lending on buy-to-let properties and equitable charges. Here’s an update on some of the latest developments we have seen.

 

Buy-to-Let

An increasing number of landlords are choosing to raise capital with a second charge on a buy-to-let property and there is a growing range of options for clients, even where the first charge lender declines their consent for the registration of a second charge.

 

The three most common reasons for a second charge on buy-to-let property that we encounter are to release equity to grow a portfolio, make improvements to the buy-to-let property or to fund improvements on the client’s own home. A lot of landlords use their investment property to fund improvements on their own home as they can cover the cost of the extra borrowing from the rental income they receive.

 

We also work with a lot of landlords who have really attractive lifetime tracker rates with lenders such as Mortgage Express, that are no longer lending and therefore do not provide consent to register a second charge against the property. Ordinarily, this would limit a landlord’s ability to raise capital on the property without remortgaging and losing their existing interest rate. However, we now have access to increasingly competitive second charges where the lender registers their charge as an equitable charge, rather than by a second legal charge. This means the lender does not take a legal stake in the property but instead is given the right for a judicial process of recovery which is why an equitable charge can be used where the first charge lender declines their consent to a second charge being registered.

 

Whilst there are a limited number of lenders available, second charges that are arranged by way of an equitable charge are available for loan amounts up to £50,000 and a maximum loan to value of 65% and can prove more economical for some landlords than releasing equity through remortgaging the entire borrowing onto a more expensive rate.

 

For example, we recently worked with an introducer who enquired about a case where the client was looking to raise an additional £30,000 on a buy-to-let property for home improvement. The property had a current value of £600,000 with an outstanding mortgage of £310,000 on an interest rate of 0.7% above Bank of England base rate for the whole of term.

 

The applicant was able to raise the additional funds by remortgage. However, this would involve losing the low lifetime tacker currently in place and it was not an attractive option for the client given his currently low monthly payment. In addition, when we approached the existing mortgage lender, they declined to provide their consent for the registration of a second charge.

 

We were, however still able to provide a second charge mortgage against the property by using a lender that would allow an equitable charge to be used. This loan was secured at an interest rate of 7.29% and allowed the client to retain the low interest rate on their first charge whilst releasing the funds they required to complete their home improvements, which was ultimately more financially attractive than shifting the whole balance onto a new rate.

 

Equitable Charges Explained

Equitable charges are not only available for second charge mortgages on buy-to-let properties – they can also be used for residential purposes. We have recently been given access to product which registers an equitable charge that has so many potential uses, we think it could be the ‘Swiss Army Knife’ of second charge lending.

 

The product is available up to 125% LTV on loans up to £25,000, up to 100% LTV on loans between £25,001 and £35,000 and up to 95% LTV on loans between £35,001 and £50,000.

 

It can be used by borrowers with a Help to Buy loan and works well for first-time buyers or home movers who want extra cash once they are in the property to make home improvements or buy furniture.

 

With an equitable charge, legal consent is not required by the first charge lender which speeds up the application process and this product uses Hometrack valuations which makes it even faster for clients who want access to funds quickly.

 

This also makes it a good choice for leasehold homeowners with a very short lease, who want to borrow funds to extend the lease on their property, and it can be as a third charge up to £25,000 and so could be used by borrowers with an existing second charge loan.

 

There are no construction restrictions and the product is available to clients with adverse credit. Given all of this flexibility, it is unsurprising that the rates are not the lowest in the market. However, this is a good stepping stone product for clients who have exhausted other avenues and have a plan to refinance onto a longer-term solution once they are able.