How do second charge loans work?

As the name suggests, a second charge loan works very much in the same way as a first charge mortgage in that it is a sum of money lent out, secured against UK residential or investment property via a second charge behind the first charge registered by the main mortgage lender

On 21 March 2016, most second charge loans became regulated mortgage contracts in the same way as first charge mortgages. This means that the processes, product types and reasons for borrowing are aligned for the first time ever. No broker can afford to ignore the growing influence of the second charge loan when considering a remortgage or further advance.:

Indeed the regulator* itself stated:

Where a mortgage seller advises a client on a capital-raising remortgage or further advance, he/she must also inform the borrower that a second charge or unsecured loan may be a more appropriate solution.

*FCA CP14/20: Implementing the Mortgage Credit Directive and the new regime for second charge mortgages

Remortgage, further advance or second charge loan?

This is the ultimate question that confuses many mortgage brokers and has prevented many getting involved in the past. Most are of course very familiar with the first two, but when would they use a second charge?

As a second charge loan requires much more detailed packaging and used to be put together in a back-to-front way compared with a mortgage, many brokers were unfamiliar with the process, and so the industry was deemed niche and left to specialist credit brokers.

Mortgage brokers who do understand the benefits of second charge loans simply introduce them to a quality packager like Y3S Loans in order to ensure maximum processing efficiency and conversion of an unfamiliar product.

The decision between which of the three products will provide the best and most suitable financial outcome for the client will usually come down to cost.

This can of course be done with a sharp pencil, a calculator and a spare 20 minutes, but a much faster and efficient way of doing it would be to use a sourcing tool which can compare the costs of products and demonstrate the savings to be made by either product.

Our own system www.miloanbroker.com is an award-winning free tool to achieve this.

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