An introduction to second charge loans
This simple reference guide is essential reading for the mortgage brokers in the face of The Mortgage Credit Directive (MCD) which is a European-wide directive that came into effect in the UK on 21 March 2016. It will take at most 10 minutes to read.
The MCD was set up to protect consumers by governing first and second charge mortgage markets (as well as consumer buy-to-lets) under the same regulation, and to provide a harmonised approach to mortgage regulation across the EU.
The Mortgage Credit Directive and second charge mortgages
The MCD went live on 21st March 2016. From that date, all regulated first charge and second charge mortgage contracts are treated in exactly the same way.
Important Do you help clients raise capital via remortgages or further advances? If you are a mortgage broker, then the answer is yes. You as the mortgage seller must inform your client that a second charge or unsecured loan may be a more appropriate solution for them.
If you do not advise on second charge loans yourself, you can introduce your client to a master broker such as Y3S who will carry out the advice and package the second charge loan for your client.Descriptive terms
- Secured loan
- Second charge loan
- Second mortgage
- Second charge mortgage
- Second charge secured loan
These are all acceptable descriptions of the same thing. For the purposes of this document we will use our preferred terminology ‘second charge loan’.
The improving economic climate and general house price increases have led to a resurgence of second charge loans following their virtual disappearance following the financial crisis of 2008.
The changing face of second charge loans
Traditionally, second charge loans were seen as a last chance saloon product. Rates were much higher than mortgages and redemption penalties were fairly hefty.
But as rates started to drop off in 2006, the pandemic of selfcertification of income led in part to the financial crisis of 2008. A £6bn a year secured loans industry quickly became a £150m industry, a trickle of its former self.
Today, the market is once again robust with packagers and lenders back in full swing, albeit at a much more sensible £1bn a year. Rates (starting at 3.75%) are much lower than ever, redemption penalties are extremely low and coupled with no upfront fees for the vast majority of second charge loans, they are a very attractive solution in a variety of circumstances.
A broker’s reference to second charge loans
Despite the new growth in second charge loans and a growing number of people appreciating the flexibility they offer, many brokers and potential borrowers still have very little knowledge of the sector and how the products can be used. Some brokers even display a fear of it.
Y3S Loans is one of the largest packager’s in the UK and accepts business from a network of thousands of finance intermediaries. We have put together this guide to second charge loans in response to a demand from new introducers who want to be involved but are unsure of where to start. From loan uses, time periods and loan amounts to repayments and rates, it provides a detailed and useful overview of how and when to use second charge loans and what to expect when advising on this type of funding.
Take time out to read through this short and simple guide, and you will be able to identify second charge loan opportunities and when they are most appropriate and for whom, so that you can help your clients discover the best possible financial outcome.
What are the main uses of second charge loans?
The reasons for using them are varied, but generally, if a mortgage broker is unable to place a capital-raising remortgage for any reason, a second charge loan can sometimes be the most appropriate alternative, and as a result can end up being a better financial outcome for the client.
Second charge loans can be used for any legal purpose but are mainly used for:
- Home improvements
- Consolidation of credit cards, store cards and unsecured loans
- Purchasing vehicles
- Paying for a wedding/honeymoon
- Injecting cash into businesses
- Paying for school fees
- Paying tax bills
- Cosmetic surgery