Imagine the following situation. Your client wants to borrow £35,000 to build an extension. He has spoken to his current lender, which will offer him the money that he requires, but on a new mortgage contract, which means that he will lose his current reversionary rate of 2% over base rate for the term of the mortgage. You can look for other remortgages to compare costs but are there any other alternatives?

Most brokers would agree that one of the toughest challenges of the past three years has been the wholesale reduction of a once flourishing remortgage market. Many borrowers have taken the seemingly better option to revert to a standard variable rate instead of switching to a less competitive product with a new lender – and who can blame them for opting for the cheaper deal?

However, many clients still need or want to borrow additional funds for a variety of reasons, ranging from home improvements to debt consolidation to funding a deposit for a second property.

Clients’ first port of call should always be their existing lender. However, increasingly common is a situation where numerous lenders use this as an opportunity to negotiate their way out of very good reversionary rates, saying “Yes, you can have the extra £35,000 you need for the extension, but you will need to transfer the whole balance onto a new product.”

Sadly, without the assistance of a streetwise, independent mortgage intermediary, many clients will passively wave goodbye to their ‘once in a lifetime’ superior mortgage terms. So are there any other options?

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At Savills Lending Solutions, we have been championing the use of second charges as a way of retaining clients on their existing mortgage contracts. I believe that it is certainly an option worth investigation and consideration.

Assuming that the first charge holder gives its consent, clients will be able to borrow the amount that they require, on the terms that they want, with no upfront fees. This can be arranged much more quickly than a remortgage and changes to the Consumer Credit Act mean that clients pay no fees until completion, including the cost of a standard mortgage valuation.
We have numerous examples where clients are considerably better off financially doing this, rather than taking either a remortgage or accepting their existing lender’s ‘new terms’.

An additional bonus for the broker is that they have a vested interest to keep in constant contact with the client, as future increases in base rate will make the current contracts less desirable and a remortgage potentially more attractive. Clients could clear the second charge, and the maximum penalty that can be charged after one month’s notice is just one month’s interest.

Second charges can be sourced at a maximum of 80% LTV and are available for both employed and self-employed clients. There are also schemes for clients with a weaker credit profile, although rates will be higher and LTVs generally lower.

Any downsides?

It should be noted that if the client is not employed with a good credit score, rates will tend to be high, as there is still not enough competition in the sector to really drive down prices.
Additionally, a potential sticking point is the fact that first-charge mortgage holders have to give consent for a second charge, and quite simply, some won’t. Prior to any commitment to your client, it is absolutely vital to check this out.

Another issue surrounding the second-charge blend relates to the valuation of the client’s property. Quite simply, the key here is that clients should be realistic with their property valuation, as a low valuation could result in much work for no reward. This is a frustrating outcome but totally avoidable.

It is true to say that the secured loan market remains dominated by master brokers. These are, in a sense, packagers for secured loans. As some lenders will not pay procuration fees, they will be partly remunerated via a broker fee which will compensate them for all the costs incurred in getting the loan to complete, which can be high.

There seems to be a large difference between the size of these broker fees and the amount that the broker will be paid so, in my opinion, it’s certainly worth shopping around.

Finally, it should be noted that most lenders will require the second charge to be set up on a repayment basis, meaning that there will be little or no flexibility in choosing an alternative repayment method.

A second charge instead of a remortgage is clearly not appropriate for every client and it is never likely to replace extra borrowing with the same lender. That having been said, it still provides the right opportunity for many clients and therefore a good mortgage intermediary should explore this to ensure that clients are well serviced and are experiencing the full benefit of good quality, independent mortgage advice.

Rob Jupp is a director at Savills Lending Solutions