With the value of the new business in the Second Charge market totalling £1,36bn in the 12 months to June 2022 (according to FLA data), the Second Charge market can no longer be considered a niche in the specialist finance sector.
Borne out of the ‘secured loans’ of the past, the Second Charge mortgage market has transformed since 2016, following regulation imposed by the FCA’s Mortgage Credit Directive. The specialist finance sector embraced this transformation, as Second Charge mortgages became subject to the same Mortgage Conduct of Business rules (MCOB) and regulations that apply to First Charge mortgages.
In this blog, we’ll define Second Charge mortgages, why they’re important for any mortgage broker and provide five best practices for getting started with Second Charge mortgages.
What are Second Charge mortgages?
Second Charge mortgages are loans taken out against equity in an owned property. The lender uses this equity as the security, enabling the borrower to raise funds. Because the Second Charge mortgage lender is behind the First, should the property be repossessed, the lender takes on more risk and therefore charges a higher interest rate than you’d see on First Charge mortgages.
Why are Second Charge mortgages important?
Brokers who do not consider Second Charge mortgages when appropriate are in contravention of MCD regulation. This is particularly the case for Directly Authorised brokers who applied to the FCA to add Second Charge permissions to existing First Charge permissions in their services.
And now they are a more mainstream alternative. Mortgage intermediaries may recommend Second Charge mortgages to their clients if they require finance where a remortgage, further advance or unsecured lending would be detrimental.
But it’s not just about adherence to regulations. It’s always about delivering the best solution to the customer. If brokers are familiar with and understand the role Second Charge mortgages can play for their clients, the benefits will naturally become clear. Here is a very high-level overview of these benefits:
- Delivers an alternative secured funding source where a first charge option simply isn’t appropriate. For example, their circumstances may have changed (employment status, credit history, salary) since they took out their first mortgage, and they are now struggling to secure additional lending.
- Perhaps they need funds in 4 to 6 weeks and couldn’t access funds this fast with a First Charge or remortgage.
- In some situations, a Second Charge may prove less costly if the product enables the borrower to avoid hefty ERCs on their First Charge or jeopardise a competitive interest rate if they remortgage.
- Second Charge mortgages can be used for any legal purpose, including home improvements, debt consolidation, tax bills, and even raising funds for a mortgage deposit.
Five tips for brokers when approaching Second Charge mortgages
- Be familiar with Second Charge mortgages, how they work and situations in which you might recommend them
- From this, make a note of opportunities to spot them as a solution for your clients
- Talk to other brokers or explore case studies to understand how other brokers have used Second Charges
- Learn how to place Second Charge mortgages / the process
- Explore areas of the process you may be able to outsource
Whether you’re a new broker, new to Second Charge mortgages or know all about them but are yet to place a case – remember you must consider Second Charge mortgages when it is appropriate to do so. With the same rules and regulations as First Charge mortgages, they shouldn’t be a burden on you to place.
So, could you be missing out on Second Charge mortgages in your broker toolkit?
For a quick chat, a meeting to discuss opportunities, or a more complicated deal on your desk get in touch with the team at Aria Finance today!