The number of people taking out a second mortgage on their home to get some extra cash has jumped to the highest level since 2008. New data shows that £93 million in loans was taken out by homeowners in March through second-charge mortgages.
They give you a lump sum, which you repay alongside your existing mortgage over a fixed term. More than 19,000 were taken out in the year to March, according to the Finance and Leasing Association. Mortgage brokers say that people are using the cash for home improvements, to pay off debts, or fund school fees.
How do second mortgages work?
A second-charge mortgage is a loan of £1,000 upwards secured against your home. You receive a lump sum to the value of the second mortgage and repay it alongside your existing one. The second mortgage is usually taken out with a different lender from the original mortgage. The loan is secured, so your home is at risk if you default on repayments to the second mortgage.
Why would you want one?
Shaun Church, the director of Private Finance, a mortgage broker, says they tend to be suitable for homeowners who don’t want to remortgage if they are on a good rate. “If you are on a base-rate tracker from years ago it does not make sense to refinance, especially if you only need to do a relatively small amount of borrowing,” he says.
Remortgaging can mean paying a hefty early repayment charge. A charge of £10,000 when you want a loan of £40,000 for home improvements is uneconomical. Second-charge mortgages are also used by older borrowers who cannot find finance elsewhere and do not want to use equity release. Lenders offering second-charge mortgages include Masthaven, Paragon Personal Finance, Precise Mortgages, Prestige Finance, Shawbrook, and United Trust.
Who are they suitable for?
Steve Walker, the managing director of Promise Specialist Lending, says the main difference between second-charge and first mortgages is lenders’ attitude to risk. Second-charge providers tend to lend at greater income multiples, up to six times your income. They also tend to be much smaller businesses, and make lending decisions based on clients’ individual circumstances rather than through a boxticking process. Mr Walker says they are more likely to lend to borrowers who are self-employed, have credit problems, or generally have more complicated requirements. He says: “It is the flexibility that is the biggest draw for clients. Even borrowers with no complications can find a second charge more suitable.”
Second-charge products may also be an option for older borrowers with interest-only mortgages. Mr Walker says: “With lenders pulling their interest-only ranges, borrowers looking to remortgage might be forced on to a capital-repayment mortgage, which often doubles their monthly repayments. Taking out a second charge allows the borrower to keep their interest-only mortgage and avoid a massive rise in monthly costs.”
What are the rates like?
The rates on second-charge mortgages have come down significantly. The cheapest deal is from Paragon Personal Finance, which charges 3.73 per cent interest. Masthaven has a product charging 3.74 per cent interest fixed for two years, before reverting to a variable rate. In 2012 the average market rate was close to 7 per cent. However, these rates remain more expensive than most first mortgages. The numbers of products available has also increased.
Are they safe?
There used to be a stigma around second-charge mortgages, says Paul Elliott, the head of specialist lending at John Charcol, a mortgage broker. “In the past some lenders did not adhere to the rules, but they have fallen to the wayside.” Second-charge mortgages are covered by some of the industry regulation. If a second charge is right for you, the mortgage lender will assess your income, outgoings and credit rating before deciding how much to lend. There are fees, including a valuation of your property, the charge for advice and an arrangement fee paid to the mortgage provider.
Under the Mortgage Credit Directive, which came into effect last year, all second-charge mortgages must be offered on an advised basis, which means advisers must be able to demonstrate a second charge is a suitable option for the client.
What are the alternatives?
Consumer loans have benefited from a boom in consumer credit as providers of unsecured personal loans and credit cards undercut each other, pushing down rates to less than 3 per cent for the first time this year. Yet you can borrow only a maximum of £20,000 before the loan must be secured against property.
Equity release, also known as a lifetime mortgage, has grown in popularity too. These plans allow homeowners aged over 55 to take lump sums out of the equity built up in their homes.