Firstly, it’s been said that the second charge mortgage market isn’t growing. However, the Finance and Leasing Association (FLA) reported just two weeks ago that the market had in fact recorded ‘strong growth’, with 1,581 new second charge mortgage agreements in April 2017, a rise of 36% on April 2016.
If you ask me whether the second charge mortgage market is growing as strongly as it should following the introduction of the Mortgage Credit Directive (MCD), my answer would be ‘no’. However, this is due to a lack of education around the true benefits that a second charge mortgage can offer customers and a nagging misconception that seconds are expensive and do not offer customers a good outcome.
While the perception is that rates are expensive, in reality second charge mortgage rates actually start from as little as 3.7%, and since the introduction of MCD the average broker now charges fees of around 3.5%, which often include processing costs, valuation and consent.
What is key to highlight here is that second charge mortgages inherently carry more risk than remortgages, because they rank second behind the first charge and this is reflected in the price. However, in return for slightly higher rates, the customer receives more flexibility over the purposes the capital is raised for, as well as protecting their preferential mortgage rate, whilst granting them access to their equity.
There is also more flexibility around who can access this finance, especially from lenders that take the time to review individual cases on their merits, rather than using an automated scoring system like many of the high street lenders.
A great example of a second charge mortgage offering the best outcome for a customer’s circumstances is a recent lady customer. The client was looking to develop a house in her company’s name, was self-employed and had missed one credit card payment. This lady would struggle to remortgage on the high street, due to the complex nature of her circumstances, despite being a no less creditworthy customer.
A second charge mortgage not only gave her the freedom to use the money raised for business purposes, something often not permitted with major lenders, but recognised the merits of her case, rather than relying on an arbitrary computer score.
There is a place for second charges. The challenge is recognising the opportunity for your customers and looking beyond the myths.