Nature of the second charge mortgage market

The majority of second charge mortgage providers in the market today are either banks, subsidiaries of building societies, or subsidiary entities majority funded by one or the other, says Matt Tristram, owner and co-founder of Loans Warehouse and Clearly Loans.

Invariably Mr Tristram says this type of finance is arranged through a broker specialising in second charge mortgages, with intermediaries in the main having access to the vast majority of lenders.

He says this ensures that clients not only benefit from the substantial knowledge and experience of the broker, but also receive the most suitable loan available.

While the industry has historically supplied this type of finance for debt consolidation and home improvements, Mr Tristram says second charge mortgages can be used for any legal purpose including purchasing investment property and capital raising to meet business needs.

After being substantially impacted by the recession, Mr Tristram says the second charge mortgage market has been growing significantly for the last 24 months, which has led to competition between lenders and therefore rates of interest decreasing.

Second charge loans are generally smaller than the first charge and can range from £5,000 to £2.5m, with the current average loan size is around £50,000.

Interest rates for second charge mortgages at the time this guide was produced in September 2014 start at 4.95 per cent based on a lifetime Bank of England base rate tracker. Deals are available over terms from three to 30 years.

Mr Tristram says: “The industry is not solely driven by a credit score so you can now find rates from as low as 4.95 per cent available to clients who would not necessarily be able to benefit from the lowest rates in the first charge mortgage market.

“There are numerous lenders offering fixed rates, without any additional tie-ins or redemption penalties.”

There are many pros of a second charge mortgage for consumers and financial advisers to consider, says Alan Cleary, managing director of Precise Mortgages.

In many cases Mr Cleary says it may well now be cheaper for the borrower to raise money by using a second charge loan rather than remortgaging their first charge loan.

Also, Mr Cleary says second charge loans are available over terms of up to 30 years or can be tied to the term of the first charge mortgage; so for some borrowers this flexibility is the key benefit of this type of finance.

The main downside of second charge mortgages he points out is the same as when applying for any mortgage product: if the borrower cannot repay the loan there is a risk they may lose the property.

Steve Walker, managing director of Promise Solutions, says the main downside of a secured loan is that the rates tend to be higher than mortgage rates, but he concedes the gap has narrowed considerably.

Mr Walker says: “The upsides of a secured loan are numerous including more generous affordability calculations, easier income proof for self-employed, an appetite to help borrowers with light or heavy adverse credit and a more common sense approach to older borrowers, unusual loan purposes or property constructions.

“Another popular niche is for buy-to-let properties where first and second charges are available with affordability based on just the rental income without supplementary income being required. Arrears and county court judgements (CCJs) are accepted and ex-pats are also catered for.

“This doesn’t mean secured loans are just for tricky cases and more loans are now geared towards prime borrowers with rates around 5 per cent where all arrears, CCJs and defaults’ can be ignored if they are over 12-months-old.”

Regulated second charge mortgages can also be completed quickly these days, Mr Walker adds, and do not have large redemption fees. Often redemption penalties are set at just one month’s interest plus payment of current month.

Clearly fees are a key consideration in the current second charge mortgage market. Mark Fry, managing director of Colonial Secured Loans, says the Consumer Credit Act dictates the maximum upfront fee a broker can charge a client for a second charge loan is £5.

As a result, Mr Fry says a fee is normally added to the loan which covers the brokers processing costs. These costs can include a valuation, consent from first mortgagee, land registry costs, credit searches and so on.

He adds the processing costs can be significant meaning that sometimes a large fee needs to be added to the loan.