Although second charge mortgages can be useful, the Money Advice Service warns taking one out is a serious step. There are several situations where taking one out may be a bad idea, Mas adds.
If your client is already only just managing to repay their mortgage, Mas argues a second charge mortgage should be avoided.
Mas states: “You could lose your home if you cannot keep up repayments on either your mortgage or the second charge mortgage.”
If your client wishes to use a second charge mortgage to consolidate debts, Mas says an adviser should question this approach.
Mas states: “Using a second charge mortgage – which can run for up to 25 years – to pay off smaller debts, such as credit cards or small unsecured loans, will mean you may end up paying more interest in the long term.
“You are also converting unsecured credit into secured credit, which could increase the risks of having your property repossessed.”
The most obvious alternative to a second charge mortgage in order to raise capital is a first charge mortgage, whether that is by way of a remortgage or further advance.
The main three issues with an alternative first charge, according to Matt Tristram, owner and co-founder of Loans Warehouse and Clearly Loans, are the potential loss of current product and its associated benefits, potential redemption penalties, and restrictive criteria applied by first charge lenders.
Obviously, other loan options, including direct personal and business loans, could be sought from a range of lenders to provide finance. Interest rates would typically be far higher, although the loans would be repaid over much shorter timescales.
In terms of debts, there are a range of solutions an adviser could recommend to improve a persons financial position and a range of alternative debt consolidation strategies or products if a second charge loan is not suitable.
Often, simply reassessing finances to put in place an incremental repayment strategy will be the least complex and costly route.
