When might a second charge mortgage be best advice?

5

scenarios where first charge lending often isn’t best advice

In this first of two features, we look at challenging lending scenarios you may come across as a mortgage broker, and how a second charge mortgage can meet the needs of both you and your customer.

At Y3S, over 50% of our business is completed ‘outside of criteria’, as we make the most of the excellent director-level relationships we have with our lender panel. So, if you have customers who don’t fit the banks’ ideal profile and are struggling to secure the borrowing they need, don’t despair – with Y3S, it’s all completely taken care of.

Second Charge Mortgages

Best alternative to a remortgage or a further advance

Loans from £10,000
Lowest rate guarantee
Up to 110% LTV
Residential and buy-to-let
Typically one months’ interest to redeem

Scenario 1: Expensive charges if an existing mortgage is disturbed

This scenario is very common. The mortgage applicant is in the middle of a fixed rate with their existing mortgage company, and will be charged a significant early redemption charge (ERC) if they borrow more money. A second charge will not disturb this mortgage, allowing the customer to raise the amount required. Once the fixed rate period has ended and the ERC no longer applies, they can remortgage (typically paying just one month’s interest).

Case Study

Whilst completing a home improvement project, the customer ran out of money and had only four weeks left to pay contractors to prevent them moving onto another project. The couple were 12 months into their 5-year fixed rate mortgage – remortgaging would have incurred an ERC of just over £14,000. Furthermore, they needed to borrow 10x their annual income, so were very worried at the prospect of having to under-sell their property with incomplete works.

Y3S secured a second charge mortgage for them, fixed for 5 years. As there were no redemption charges, this allowed them to remortgage and redeem our loan cost-effectively once the fixed rate on their mortgage expired. After reviewing their income, expenditure and payment profile, the lender was comfortable with the customer’s affordability. The funds were raised within 3 weeks, ensuring peace of mind, no delays and crucially, no distress sale of their home.

Scenario 2: The applicant may lose their interest-only facility

The applicant already has an interest-only mortgage, which lenders rarely offer anymore. By remortgaging, their interest-only facility will be replaced by a capital repayment mortgage. Their new monthly payments will now include not just the interest element, but repaying the mortgage as well. So, the payments increase significantly, often putting people into a position where they can’t make the payments on their existing mortgage, let alone the extra amount they’re applying for. By taking out a second mortgage they are able to protect their interest-only facility and the combination of the two will be far less than the whole mortgage being on a capital repayment basis.

Case Study

The customer needed to raise £60,000 for a ground floor extension, including a new kitchen, boiler and overall decoration. Their interest-only mortgage cost them £246 a month. To remortgage they were quoted £1,098 a month on a capital repayment basis, more than four times their existing repayment. They feared this was their only option and might be forced to sell their family home.

Y3S arranged a second charge mortgage for the full £60,000 with monthly payments of £429.57, fixed for five years. This saved them £422 a month compared with the remortgage quote, whilst also protecting their interest-only facility. They were able to complete the works needed and stay in the home in which they wished to retire.

Scenario 3: The applicant has a complex form of income

High street lenders typically require the applicant’s three most recent payslips or two years’ audited accounts to assess affordability. Where the applicant has various forms of income (for example, a second job, income benefit, pension, overtime), second charge lenders are more open-minded and consider each application on its own individual merits.

Case Study

Our applicant, a barrister, works on a self-employed basis and is paid in lieu. A decrease in earnings due to Covid was reflected in the following year’s tax return, which he had to provide as part of his application to borrow £400,000. His mortgage company declined the application which caused him great concern as the capital required was to buy into his practice.

Y3S liaised with his accountant and obtained a forecasted turnover and profit assessment which satisfied our lender, successfully raising the full amount at an interest rate of 5.4%. The process took less than 3 weeks from application through to cleared funds.

Scenario 4: The applicant has impaired credit

Missed payments on a credit card, mortgage or even a mobile phone contract can be enough for someone’s mortgage application to be declined by a high street lender. Our second charge lender panel takes a different view on impaired credit: as long as the rationale for the missed payments is clear, they will allow the application to proceed.

Case Study

The customer needed a loan for essential home improvements, but their credit file revealed recently missed payments on various credit cards due to redundancy during the pandemic. As a result, no mainstream mortgage company was willing to help.

Y3S looked into the reasons for the missed payments and established confidence in the customer’s control over their finances, having since found new employment. We raised the full amount for them on a rate of 6.7%, with payments of £314.88 a month fixed for five years. Our advice included coaching the customer on the importance of making all payments on time, hopefully enabling them to remortgage in a few years’ time.

Scenario 5: The applicant is self-employed and needs ‘income projections’ to prove affordability

Most businesses have been adversely affected by the events of recent years with decreased turnover and profits. This deters most of the mainstream lenders; but some second charge lenders will take comfort in receiving a report from the applicant’s accountant and use the income projections for the current financial year.

Case Study

The customer wanted to complete home improvements but couldn’t raise the money as his 2020-21 tax returns showed a drastic reduction in income due to Covid. His limited company was halfway through the financial year, enough to give his accountant the confidence in confirming improved projected income and profit over the previous year.

The lender funded, confident the customer’s income was higher than their submitted SA302 income, and based the affordability on the projected income from the customer’s accountant. This enabled him to complete the necessary home improvements and remove the huge stress suffered as a result.

The UK’s largest specialist finance packager is ready to take care of your next case

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We’ll completely take care of it

When first charge lending options are drying up, Y3S can help you and your customers. Simply hand the name and contact details to our team and we’ll take care of the case, end to end. Your commission will be paid within 24 hours (so you get your commission before we do) and remains yours, even if ours is clawed back.

You can trust us to look after your customer, protecting your brand and relationship in the process. Our Platinum Feefo rating – for three consecutive years – shows just how far our exceptional service and know-how reach.

Look out for the second part of this article, with more examples in which very specific needs can be met by second charge mortgages.

Why use Y3S?

A business based on reputation..

Established for over 20 years, all customers have been referred to us from financial intermediaries throughout the UK. Service is our focus, ensuring repeat business from our valued introducers, and referrals from our customers.

… with a focus on speed of service …

As most people want funds as quickly as possible, our courier service is of paramount importance. As being the only firm in the UK to offer this as standard, all documents are despatched and collected using our in-house team couriers, greatly speeding up turn around times.