In March 2016 the Mortgage Credit Directive (MCD) introduced, for the first time, the requirement for brokers to consider a second charge mortgage alongside a remortgage when identifying the most suitable product for clients looking to raise funds on their property. It can, however, be difficult to recognise when a second charge mortgage is the best solution for a borrower – so when should you consider a second charge mortgage?
To begin with, there are often situations where a client might be unable to secure a first charge mortgage, perhaps because they have adverse credit, are recently self-employed or their situation has changed since they took their mortgage. Some second charge lenders have more flexible criteria than the first charge market and so, if your client is struggling to release equity from their property with a remortgage, a second charge mortgage could be the answer.
But second charge mortgages shouldn’t just be considered when a client can’t access the first charge market – there are many situations when a second charge mortgage can be more cost effective, perhaps because the client is in the ERC period on their mortgage or would lose a low lifetime rate if they were to remortgage. Second charge mortgages are also generally faster and more convenient, which might be the most important consideration for your client.
Six top reasons for second charge lending
- Borrower on a low legacy rate – There are many borrowers on a lifetime tracker or variable rate that is so low that they would be unable to match their current rate by remortgaging. For clients in this situation who want to raise extra money from their property, it can sometimes be more cost effective to use a second charge mortgage to borrow the money rather than shift the entire balance onto a more expensive rate.
- Borrower on an interest only mortgage – We also encounter clients on an existing interest only mortgage who, if they were to remortgage, would need to shift to capital repayment. A second charge loan can enable borrowers in this situation to borrow money on their home and keep their existing interest only mortgage in place.
- Debt consolidation – By moving the balances onto a cheaper second charge mortgage, borrowers can immediately relieve some of the strain while they work towards a long-term solution to manage their debts, but always remember to talk to clients about the considerations involved in moving unsecured debt to secured debt.
- Home improvements – Second charge lending has always been a popular choice for people carrying out home improvements. In many instances, where the improvements are likely to result in a significant increase in the house price, it can be beneficial to take a second charge loan to pay for the work and then remortgage at the higher property value and, therefore, a lower LTV. This approach could help a client to benefit from a lower first charge mortgage rate in the long term.
- Tax bill – It’s possible to use a second charge mortgage to raise funds to pay a tax bill. A lender will generally want to know why the client didn’t have provision to pay the bill and that they are in a position to pay future bills.
- Raising funds to buy another property – With stress test limitations on buy to let mortgages, we are seeing clients accessing larger chunks of equity in their residential property, with a second charge loan, to put down a bigger deposit.
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