What is a second charge mortgage and why would you take one out? If you already have a first mortgage and require further finance, a second mortgage could be an option. Maeve Ward, managing director, residential mortgages at Shawbrook Bank, explains
Following the introduction of the new mortgage regulations in March 2016, a ‘secured loan’ is now referred to as a ‘second charge mortgage’. This is to reflect the fact that a second charge mortgage is now completely aligned to that of a standard or ‘first charge’ mortgage, in that they both follow the same process and offer the same level of consumer protection.
In fact, they are so aligned, a mortgage advisor must now consider a second charge mortgage alongside a first charge mortgage if the customer needs to raise finance. This is to ensure that the customer receives the best possible outcome for their circumstances, not just in the short term, but the long term too.
Fact find
Their alignment doesn’t end there. As with a first charge mortgage, a second charge mortgage is an advised sale whereby a qualified advisor will discuss your needs and requirements – often referred to as a fact find.
They will take this information, research the market from their panel of lenders and then make a recommendation providing the best possible outcome, and produce what is known in the industry as an ESIS (European Standard Information Sheet). This document clearly sets out the mortgage terms so you can easily compare this particular second charge mortgage with others in the market, so that you can be satisfied you are receiving the best possible outcome.
Application
Once you are happy, the mortgage advisor will then process your application, submitting it to the lender who in turn will underwrite the application.
Once the lender is satisfied that you satisfy their lender criteria and can fully afford the mortgage, just like a first charge mortgage, you will be issued a binding mortgage offer and given a seven-day reflection period. This gives you breathing space to reflect on the offer and whether you would like to go ahead. So you can be safe in the knowledge that just like a first charge mortgage, you are in complete control and have all the safeguards in
place.
Reasons for raising finance
Whilst both first and second charge mortgages are similar in their protection of you the customer, there are some differences that make a second charge mortgage a little more flexible in terms of ways you can use the finance raised.
The capital raised from a second charge mortgage can be used for almost any legal purpose, unlike a remortgage which is generally used for home improvements, consolidation of debt or for property investors looking to raise the deposit for their next property.
Second charge mortgages on the other hand, are perfect for customers who have more unusual circumstances and need the flexibility that is often lost from the high street banks, thus making this form of finance a real alternative to the traditional remortgage.
Here are just a few types of customers with more unusual circumstances, who could be helped by a second charge mortgage lender.
Self-employed
High street lenders generally require 12 to 18 months of employment history. So what happens to those that do not meet these criteria? Perhaps they have transitioned from a sole trader to a limited company? In this scenario, many high street lenders will view this as a new business, ignoring the person’s employment record.
As a result, this customer could face being declined for finance, due to lack of experience, when in reality it is just the status that has changed.
Second charge mortgage lenders, including Shawbrook Bank, will consider self-employed individuals with as little as six months accounting history, subject to affordability.
What can also be of help to the self-employed, is that the capital raised from a second charge mortgage can also be used to clear a large tax bill, subject to proof of the monies owed from the HMRC.
Lending into retirement
High street lenders tend to be reluctant to lend beyond retirement, despite many customers still working and planning on continuing to work beyond retirement age.
A good example of this would be a customer who might run their own family business and will continue to receive an income from it when they retire.
Second charge mortgage lenders are a lot more flexible when it comes to retirees, providing there is clear evidence of how the customer will continue to repay the second charge mortgage once they have retired.
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To give you an idea of what is available; here is what the second charge mortgage market is currently offering:
- Borrow up to £2.5 million
- Borrow up to 95% loan-to-value (LTV)
- Fixed, variable, discounted and tracker rates
- Free and flexible overpayments with no maximum cap
- No early redemption fees
PLEASE NOTE: Any property used as security, including your home, may be repossessed if you do not keep up repayments on a mortgage, or on any other debt secured on it. A broker fee will apply.
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Property investors
An investor may have a portfolio of buy-to-let properties and wish to release equity quickly to purchase a further property at auction, as well as raise monies for home improvements allowing them to improve the property and sell it on at a profit.
Many investors will have low rate mortgages, many on interest-only, that they do not wish to disturb. If they were to remortgage, the investor may lose their favourable rate and could end up paying a lot in fees.
With a second charge mortgage however, that can be arranged within as little as five to seven days, the investor has the flexibility to raise finance without having to use any of their own cash and keep their existing mortgage terms in place.
What may also be of interest to property investors are those with existing bridging finance arrangements who are facing the dilemma of the original exit falling through or no longer viable, with potential penalties on the horizon. A second charge mortgage could be the answer, where the investor can raise the money to exit the bridge, providing a cheaper alternative to bridging finance.
A second charge mortgage can also help where there is a property with a short lease that is negatively impacting a valuation. The money released can be used to extend the lease, increasing the property’s value once it comes to the sale.
Customers with impaired credit
At Shawbrook we recognise that some customers may have fallen on hard times financially, not because they mismanaged their affairs, but because they are a victim of unfortunate circumstance, such as redundancy, bereavement or an accident. This does not mean that these customers are ‘poor payers’, they simply have not had the means by which to pay their existing financial arrangements.
This is not lost on second charge mortgage lenders, many of whom ignore impaired credit, if over 12 months. Some will consider impaired credit within the last 12 months, if the customer has found themselves in an unfortunate situation, but is now sustaining or improving it.
A second charge mortgage is one way that allows the customer to consolidate all their outgoings into one more manageable repayment, whilst repairing their credit score. This could mean that within 12 to 18 months they meet the criteria of the high street lenders and are able to remortgage onto a lower rate of finance because their credit score will have improved and the impaired credit will be in the past.
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So why Shawbrook?
Voted as the best secured loan lender by customers, we offer fast and efficient systems, common-sense decision making and we look at each case individually, underpinned by an experienced and customer focused team.
Having won two prestigious awards this year for ‘Best Secured Loan Lender’ from ‘Moneyfacts’ and ‘What Mortgage’, we are confident that we offer a five star service.
We also work with a panel of highly professional and specially chosen mortgage intermediaries who can provide you with guidance and expertise, recommend the best outcome based on your circumstances and support you in providing all the right paperwork to the lender.
To find out more about a Shawbrook Bank second charge mortgage and how we can help, please contact us today on 0345 600 7681 or visit www.shawbrook.co.uk.
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