What kind of clients are taking advantage of second charge?

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Enterprise Finance
What kind of clients are taking advantage of second charge?

Second charge lending has a number of uses and one of the advantages of this type of loan lies in its flexibility.

It may be the case that those who need to raise funds are not aware they can do so through a second charge which is, of course, where advisers and brokers come in.

Understanding the type of scenarios in which this kind of lending can be applied may also help advisers become more knowledgeable about how and when to recommend second charge lending to their clients.

This type of lending can be suitable for a far wider range of situations than many realise.

“A second charge mortgage provides an extremely useful alternative where consumers want to raise additional funds but do not want to change their existing first charge mortgages – especially if there would be additional costs in doing so,” suggests Fiona Hoyle, head of consumer and mortgage finance at the Finance and Leasing Association (FLA).

For example, she explains it could be used to fund home improvements, for loan consolidation and paying for a deposit and removal costs for a son or daughter moving into their first home.

Property ladder

Parents are increasingly helping their children onto the property ladder by lending them money for their first home as young people find themselves stuck in a cycle of renting and being unable to build up enough of a deposit.

We have done a second charge to help clients clear debts that were eating up all disposable income and edging towards payment default. Mark Dyason

According to research from Legal & General and economics consultancy Cebr, finds parents, or the Bank of Mum and Dad, will be involved in 26 per cent of property transactions taking place in the UK market this year.

The findings show parents will lend over £6.5bn in 2017, up from £5bn in 2016, providing deposits for over 298,000 mortgages, and helping others to purchase homes worth £75bn.

Peter Williams, sales director at John Charcol, acknowledges this trend is playing out among his customers.

“We have had a number of cases that have released equity to help children get on the ladder and remortgaging a really low rate was not best advice,” he recalls.

Another of the main reasons for applying for a second charge is for credit purposes, particularly if those are fairly urgent or there is evidence of poor credit history.

Mark Dyason, managing director at Thistle Finance, explains: “The clients most likely to benefit from a second charge are those looking for smaller amounts of funds where the main mortgage is on an historic term base rate tracker product, those who need a slight stretch on affordability or where the credit issues are not catered for from the first charge specialist market e.g. current mortgage arrears.”

He has helped a couple of clients in these types of situations to take out a second charge when it may have seemed they had very few options.

“We recently did a second charge for a client to clear a large tax bill avoiding court action,” Mr Dyason says. 

“Another client looking to buy a property that was not mortgageable (wooden with a short leasehold) raised money on his buy-to-let despite having a significant early repayment penalty and remortgaged the whole amount at the end of the tie in period.”

He adds: “We have done a second charge to help clients clear debts that were eating up all disposable income and edging towards payment default, making sure the affordability was eased and allowing them to plan better for the future.”

Quick process

Andrew Fisher, managing director at mortgage broker Freedom Mortgages, explains the speed at which a second charge can be processed means it is useful for those who need access to funds at fairly short notice.

“Whereas a first charge mortgage typically takes 40 days to complete, a typical second charge mortgage can be completed within just two weeks – making it a viable and efficient option for people looking to secure extra finance, where speed is a priority,” he notes.

He confirms second charge mortgage products can be used for a wide variety of loan purposes and has seen a lot of his own customers using this type of borrowing, in addition to their existing first charge mortgage, to avoid early repayment fees. 

Our customers are using finance from a second charge mortgage for a variety of purposes, from a new car, to refurbishing homes or even setting up a new business.Andrew Fisher

“We are also taking lots of enquiries from customers who already have a low-rate first charge mortgage and want to maintain this rate while raising additional funds. 

“Our customers are using finance from a second charge mortgage for a variety of purposes, from a new car, to refurbishing homes or even setting up a new business,” Mr Fisher notes.

Joshua Gerstler, financial adviser at The Orchard Practice, tends to find the clients he introduces to second charge lending “are those who want to consolidate debts to reduce their monthly outgoings and for whatever reason are unable to do this via a first charge mortgage, which would be cheaper for them”.

He explains how this works in practice for a client with a bill to pay and a history which would usually go against him.

“I had a client of mine recently look at second charge lending because he needed to raise funds to pay a tax bill to HMRC but was unable to do so with a first charge mortgage due to his poor credit history,” Mr Gerstler says. 

“We have looked at raising the funds as a second charge and then refinancing it onto a first charge when his credit position is good enough to meet lenders criteria.”

There are all kinds of clients for whom second charge lending offers a solution, not just those with poor credit histories or tax bills to pay. 

However, this could be one reason why the market has a reputation as a sort of last resort.

Mr Williams suggests second charges can suit high net worth individuals seeking a little bit more flexibility, or those who are developing properties, for example.

He insists: “Most of our business is clean, hardly any adverse and consist of clients not wanting to repay high ERCs.”

Examples like this may help build confidence among advisers and their clients in second charge lending and the usefulness of this type of loan.

eleanor.duncan@ft.com