Clients who should consider second charge loans

He says a second charge loan is specifically designed as a medium-term facility for homeowners looking to raise money quickly, with a view to keeping their long term commitment (mortgage) and other borrowing separate.

According to the Money Advice Service, there are several reasons why a second charge mortgage may be useful and should be considered by you for your clients.

If your client’s credit rating has worsened since taking out their first mortgage, Mas points out remortgaging could mean they end up paying more interest on their entire mortgage, rather than just on the extra amount they want to borrow.

Under these circumstances, Mas states your client may be best off opting for a second charge loan.

This is particularly prevalent in the wake of the Mortgage Market Review, which substantially altered the affordability criteria set by banks and many clients will find they are either refused or offered radically different terms than when they originally took out their loan.

The first and most obvious people who may benefit from a secured loan are those who have been declined for a remortgage simply because there are so many scenarios which first charge lenders don’t cater for, says Steve Walker, managing director of Promise Solutions.

However Mr Walker says brokers now need to compare if a secured loan may be a better solution than a remortgage and adds there are many scenarios where this may be the case.

Mr Walker points to borrowers who are on a tracker/fixed rate deal, which they don’t want to lose; borrowers who will suffer high early redemption charges if they remortgage; or borrowers who have an interest-only mortgage and do not wish to move to capital and repayment.

In addition, Mr Walker says a remortgage may be available but the terms are unattractive due to current circumstances. He says a loan may therefore provide a short term solution and the remortgage can be revisited in a few years time.

Alongside all of the above examples, borrowers who might contemplate a second charge mortgage include self-employed business owners who need better trading accounts to obtain a leading remortgage rate, he adds.

Mr Walker says a second charge mortgage may provide the stop gap some borrowers need until circumstances improve and they can remortgage at more favourable rates.

He says: “A remortgage may also not be the most suitable option due to the loan purpose, the borrower’s age or the type of security available. Brokers need to carry out the comparison on every occasion.”

In pure money terms, Alan Cleary, managing director of Precise Mortgages, says many people could find themselves financially better off taking a second charge mortgage rather than remortgaging because it allows the original mortgage to continue at the existing rate.

Mr Cleary points out the original first mortgage rate may be at a much better rate than can be achieved today. In addition, he says some people simply cannot remortgage their first charge loan.

Mr Cleary says a typical example of this is someone who has an interest-only mortgage.

He says: “Interest-only mortgage loans are more difficult to obtain now and if the borrower needs to borrow more money but wants to keep the interest-only option, it may make more sense to keep the first charge in place and take a second charge on a capital and interest basis.”

Everyone is aware of the historically low Bank of England base rate, which has led to some low interest rate home loans available from first charge mortgage lenders.

As a result of the state of the first charge mortgage market the typical second charge mortgage customer now is someone with a very good first charge mortgage product, looking to raise additional funds but not wanting to lose the benefits of their current mortgage, says Matt Tristram, owner and co-founder of Loans Warehouse and Clearly Loans.

Mr Tristram says: “The products available in the market today are specifically designed to be available to all types of customers whether that is someone with perfect or impaired credit history there is often a product available.”