Rates, products, fees – the new world of second charge lending

Since the Mortgage Credit Directive (MCD) took effect from March 21st, the opportunity for second charge mortgages has arrived. The Mortgage Credit Directive introduced a new European Framework with respect to the selling of first and second charge mortgages.

For independent brokers, to retain their independent status they need to offer the advice on both first and second charge mortgages. At the recent Specialist Lending Senate, a Mortgage Solutions event, there was much debate about dispelling the myths preventing some mortgage advisers from entering, in relation to fees and products.

Advisers said second charge products were not aligned to those offered in the first charge space. The reality is, in the main, they are aligned; base rate trackers, variable, fixed and interest only all exist, so perhaps the key to growth in second charges is still very much in the education.

Many mortgage brokers still assume that they are a last resort but the reality is that that they should make second charge mortgages second nature. Vast amounts of customers are on preferential mortgage rates, lifetime trackers and interest-only products that would see them lose out if they remortgaged to capital raise. The market rate for second charge mortgages starts from 4.5% – there is still the perception in the market that second charge mortgages start in double digits.

Over the last 12 months fees have reduced significantly with the average now being 5 to 6%. Under the new regime, customers are now offered a choice in how they pay for the fees which can be upfront or added to the loan, although where added, the customer must have positively elected to do so.

This contrasts markedly with the 10% fees charged by brokers two years ago, a necessity under the old Consumer Credit Act regime where customers were not allowed to be charged fees upfront. At that time, the broker ran the risk of abortive costs if the customer changed their mind at the last minute, despite the broker having paid for the valuation and consent.

As second charge mortgages will increasingly be considered by advisers alongside a remortgage and a further advance, customers will be presented with a broader range of financing options by advisers. This will lead to positive customer outcomes and raise the profile of the second charge mortgage market.