Regulated Second Charge Mortgages
Second-charge mortgages weren’t regulated until 2016, but now have a number of rules and regulations in place to protect customers and hold lenders to a high standard. Entering into a second charge mortgage agreement is now as safe as a first charge mortgage agreement.
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What Are Second-Charge Mortgages?
Second-charge mortgages are an alternative to remortgaging your property or opting for an unsecured loan. A second charge mortgage is a loan secured against any equity growth that has accrued during your ownership.
This type of mortgage is also known as a second charge, homeowner, or home equity loan. It can be secured with any UK residential property type.
Second-charge mortgages are also known as secured loans, and the terms can be used interchangeably.
The Mechanics of a Second-Charge Mortgage
Second-charge mortgages are essentially secondary loans that are taken out against the equity of your home. They work similarly to a standard, mainstream mortgage, other than the aforementioned fact. They also run alongside your pre-existing mortgage, meaning you’ll pay off two loans simultaneously.
You apply with a lender to borrow money and agree to repay it over a number of years at either a fixed or variable interest rate. Payments are made on a monthly basis. The loan is often repaid over a 25-year period, although it is possible to get shorter or longer loans.
Typically one would borrow anything from £1,000 up to several million. The amount you are approved to borrow is dependent on your finances and the value of your home equity.
Are Second-Charge Mortgages Regulated?
In most cases, second-charge mortgages are regulated. The Financial Conduct Authority (FCA) is in charge of this, and they implemented a new set of rules regarding second charge mortgage regulation in 2016. These new rules are known as the Mortgage Credit Directive (MCD) second charge rules.
There are a few exemptions to the rules, such as a buy-to-rent property that was bought purely for investment purposes. In this scenario, the property is defined as non-regulated, and any secondary mortgages will be treated as such.
The regulation of secured loans and second-charge mortgages has resulted in better consumer protection. Brokers are not able to get away with giving out bad advice or attempting to mis-sell their products. All second-charge mortgage lenders must comply with the FCA mortgage rules across the board – advice, payment difficulties and affordable lending options included.
How To Apply For A Second-Charge Mortgage
There are three requirements for a second-charge mortgage application. You need to ensure that you own sufficient property equity, that your income is high enough to cover the costs of both mortgages, and that you have a good credit rating that will be acceptable to second-charge mortgage lenders.
It is important to bear in mind that there are often additional legal and administrative fees involved in the application process and that you’ll likely need to pay for a full property and personal valuation. There may also be early repayment charges incurred if you choose to repay your loan early.
Why Do Second-Charge Mortgages and Secured Loans Have a Bad Reputation?
Due to some questionable marketing campaigns, second-charge mortgages and secured loans have built up a somewhat negative reputation. They have been sold as a way to consolidate all debts into a single monthly payment.
This has, unfortunately, resulted in customers using a second mortgage to pay off other debts. This can be a positive move, but often people will start to borrow again and thus drastically increase their debts. Not only are they paying off two mortgages, but they are also building up credit card debt, and other debt along the way.
If the borrowing gets out of hand and the client cannot make the necessary repayments, they will likely lose their home. If they had just paid off their original debts and not taken out a second mortgage, the likelihood of them losing their home would be significantly lower.
It is recommended that one speaks to a professional debt advisor regarding how to manage one’s debt rather than taking out further loans.
Pros of A Second Charge Mortgage
- A second-charge mortgage can be more affordable than alternative options, such as credit cards.
- They prevent you from changing your current low mortgage rate
- They have a higher approval rate for those with poor credit scores compared to other borrowing options.
- Their borrowing terms are longer than those for unsecured loans – often, you can have up to 25 years to pay off the amount.
Cons of A Second Charge Mortgage
- Your expenses and debt increase as you’ll be paying off two mortgages
- Defaulting on payments has a high chance of costing you your home.
- The longer lending period results in significantly more interest than a standard loan.
- If you plan to use the second charge mortgage as a form of debt consolidation, you need to be highly disciplined.
Is It Better To Remortgage Instead?
There are good reasons to take out a second mortgage, just as there are plenty of good reasons to remortgage instead. The decision will be based entirely on your personal circumstances.
A second mortgage can be great if you have a particularly low-interest rate on your first mortgage. A second charge mortgage will allow you to retain this good rate while still accessing the necessary additional funds that you require.
A second-charge mortgage is also a good option if you are subject to an early repayment charge on your original mortgage. These charges can be quite high, especially early on in the process. Once you are closer to the end of the fixed term, the charge may become low enough for a remortgage to be more viable than a second mortgage.
If you can remortgage your home for a lower rate than your current interest rate, this is a better option than choosing a second-charge mortgage. Remortgaging also has the added benefit of reducing the number of monthly repayments and is safer in the long run, as you will have a lower risk of losing your property.
A further advance is an alternative to both the above options. It involves adding an extra loan to your mortgage through your current lender. These normally carry a higher interest rate. They are very similar to a second mortgage but have the perk of being from the same financier and thus require slightly less paperwork.
How Second-Charge Lending Is Regulated
Disclosure of information
There are a variety of new rules regarding the disclosure of information to new clients. Read more below:
- All services must be fully disclosed to consumers before any decisions are made, as should any remuneration information. Lenders are also required by the FCA to disclose any alternative options (such as additional borrowing) that could benefit the client.
- This must be done clearly, and lenders must ensure that the client is aware of the alternatives. The alternatives must be communicated orally if they are working on a spoken agreement.
- Lending firms must provide clients with a European Standardised Information Sheet. This is a standardised document disclosing important information about the product. It is designed to make it easier for customers to shop around and make fully informed choices.
- Lenders are required to treat a second-charge mortgage the same as they do a first-charge mortgage. They must provide clients with a clear offer that includes a detailed list of any tariffs and charges involved.
- The same information that is disclosed at the completion of a first charge mortgage sale must be disclosed at the completion of a second mortgage sale.
- Firms must agree to send out an annual statement and provide customers with any documentation regarding important events, such as handling payment difficulties or implementing contract amendments.
Standards for selling and advising
Second-charge mortgage sales must comply with first-charge mortgages’ selling and advising standards. After the rule changes in 2016, it has become uncommon for execution-only sales to take place.
Responsible lending rules
- Second-charge mortgages are subject to the Mortgage Credit Directive credit rating assessment. There are also additional rules put in place by the FCA.
- Second-charge mortgages are subject to the MCOB rules regarding affordability. These rules ensure that lenders take future increases in interest rates into consideration when doing any affordability assessments. Lenders must test affordability before signing off on any loan secured against a high-ranking property.
- If a second-charge mortgage is being used for debt consolidation, the lender must ensure that the debts are repaid, or they should include them in any affordability assessments that take place, noting that the debts remain unpaid.
- Interest-only second-charge mortgages are subject to the MCOB Interest-only rules.
Contract variations
All second-charge mortgage lenders must adhere to the Mortgage Conduct of Business (MCOB) rules regarding contract variations.
If a transaction is straightforward and doesn’t involve additional borrowing, it is possible for the client to opt for an execution-only transaction. This means lenders aren’t required to do additional affordability assessments or credit rating checks.
Fees, charges and payment difficulties
- Clients need to choose fees (such as broker fees) and charges to be rolled up into their loan – doing so without their consent is illegal.
- A second-charge mortgage is also subject to the MCOB early repayment charges. Back book options must comply with the early settlement provisions in section 95 of the Consumer Credit Act.
- It is illegal to impose any pre- and post-contractual charges. If a firm wishes to charge a client, they need to seek advice from MCOB to ensure that they don’t overcharge the client.
- Any provisions made in the MCOB for payment difficulties or arrears are applicable to second-charge mortgages. They have replaced any requirements from the Credit Consumer Act featured in the Credit Consumer sourcebook.
- A second charge mortgage lender is no longer subject to the same restrictions regarding charging of interest on outstanding amounts as they were under the Credit Consumer Act. However, under MCOB, second mortgage lenders can only charge simple interest on outstanding payments.
Payment shortfalls and repossessions
Chapter 13 of the MCOB has rules about how defaulting on payments should be handled and the best way to manage repossessions. These rules apply to both first and second-charge mortgages.
FAQs
Is a second-charge a regulated mortgage contract?
A second-charge mortgage is a regulated mortgage contract. The change occurred with the implementation of the Mortgage Conduct of Business rules in 2016.
What is the difference between a first-charge and a second-charge mortgage?
The main difference between first-charge mortgages and second-charge mortgages is that a second-charge mortgage is taken out against any equity you own on the home that is covered by your first-charge mortgage.
These mortgages are also more likely to have a significantly longer repayment period, and their interest rates may not be as low as first-charge mortgage rates.
What is the difference between a regulated and non-regulated mortgage?
A regulated mortgage is a loan that is subject to regulations put in place by the Financial Conduct Authority. These regulations protect consumers from bad advice and from brokers or lenders trying to mis-sell products. Unregulated mortgages are loans that aren’t subject to these same regulations and, thus, don’t have the same level of consumer protection.
Who regulates second-charge mortgages?
The Financial Conduct Authority is in charge of regulating second-charge mortgages. The regulations are covered in the Mortgage Conduct of Business as well as by the Mortgage Credit Directive.
Final Thoughts
The implementation of new rules and regulations around second-charge mortgages and their lenders has drastically reduced the risk associated with them and makes it much easier for consumers to make better-informed decisions when choosing the best borrowing option for their circumstances.
Contact us now for expert regulated second charge mortgage advice.