As a master broker, one of our core product offerings is the second charge mortgage. Despite its growth in the specialist mortgage market, many brokers often confess to us that these particular mortgages can leave them scratching their heads.
Sound familiar? Don’t worry. Here we shed some light on the mystery by answering six questions brokers often ask us about these loans:
1. “What are the basic facts about second charge mortgages?”
If you’re not 100% clear on the facts around second charge mortgages, you’re not alone. We often hear from brokers who don’t fully understand the details or where to start. And if you’re brand new to the brokerage world, you may still be getting to grips with first charge mortgages.
Previously referred to as ‘secured loans’, second charge mortgages used to be perceived in a negative light. But they’ve since changed so they’re no longer viewed as a high-rate, heavily subprime option associated with PPI mis-selling.
Instead, second charges actually offer competitive rates at a small premium to first charges. Lending is prudent, based on full affordability and income checks, with an average LTV of 59%. And as these loans are MCOB-regulated, you can be confident your customer will have the protection of FCA regulations and be treated fairly at all stages of the process.
Second charges are taken out by mainstream borrowers for a whole host of reasons. For example, they’re often used for home improvements, second property deposits, tax debt repayment, business finance or school fees. As well as those in prime credit, borrowers often include people who are credit-impaired, self-employed or “stuck” in their first charge.
2. “When should I recommend a Second Charge?”
Some brokers tell us they aren’t sure when a second charge could be an appropriate capital-raising alternative to a first charge. This means they might be missing opportunities and not recommending the best solution to their clients.
It’s also a problem in the context of the Mortgage Credit Directive (MCD), implemented in 2016. This requires mortgage advisors to consider second charges if they’re the best solution for their clients. But if you’re unclear how they work and what they can be used for, this can make things tricky.
So when might you look at a second charge over a first charge?
The most obvious scenario is when a first charge just isn’t an option. Maybe the borrower is self-employed and lending criteria have tightened since they took out their first mortgage. Or perhaps they’re credit-impaired, at the salary multiple limit, or need the funds within four to six weeks.
There are other cases where a second charge might also be appropriate. For example, they can sometimes simply prove cheaper than remortgaging – particularly if your client faces heavy early repayment charges.
3. “How do I place a second charge?”
Placing a second charge mortgage can seem daunting if you’ve never done so before. Knowing the key steps will make your life much easier. Here are the six stages of placing a second charge by working in partnership with a master broker like Vantage Finance:
Stage 1: Client enquiry
The first step is to listen to your client’s needs for raising capital and review the first and second charge options. If you feel a second charge would be most suitable, it may be worth referring the client to Vantage. Let them know you’re passing their case to a master broker but you’ll still be in touch throughout the process.
Stage 2: Advice – initial contact with Vantage
At this point, Vantage will usually contact your client to take them through the process. Our first tasks are to identify the best second charge product on the market, carry out initial suitability assessments and explain the terms to the client. But don’t worry, we’ll keep you updated as much as you want. Even before the fact-find and receiving the paperwork, we’ll instruct a valuation and request consent from the first charge lender. This will help make the process as quick and efficient as possible.
Stage 3: Advice – fact-finding and sourcing
The next step in the advice process is to conduct a fact-find with the client. We’ll ask them to supply the specific information required for a second charge mortgage, and reassess their case based on this. Then we’ll source and recommend the product that’s the best fit for them, before talking them through the terms.
Stage 4: Packaging – processing
We then start the packaging process. We’ll send the paperwork to the client, including the ESIS and checklist of supporting documents.
Stage 5: Packaging – submission
Now we’re ready to package the case and submit it to the lender. They’ll review and underwrite it, requesting any additional information or actions as required. They’ll also conduct a security call with the client and confirm their details.
Stage 6: Completion
Finally it’s time for completion. We’ll prepare the binding offer and get this signed by the client before sending it to the lender. After we’ve received confirmation of completion, the client will get the funds. We’ll then pay you – and your network, if appropriate – an introducer fee within three days of us receiving our broker fee and commission from the lender.
So, as you can see, when you work with a master broker they’ll do a lot of the heavy lifting for you. All you really have to do is give the initial advice and make the referral.
4. “How can I help the process go smoothly?”
The answer is by being as clear and transparent with your client as possible. In plain English, explain why a second charge can best solve their needs and exactly what they can expect from the process. This will alleviate any concerns they have and give a better chance everything going without a hitch. Don’t forget to:
– Set your client’s expectations in terms of costs, fees and charges
– Be clear on what documentation is required
– Explain the importance of them being transparent and providing complete information
– Get consent for credit checks upfront and share the client’s personal data with Vantage (we’ll do a soft credit check at initial stage, with the hard search completed at full application stage by the lender)
– Share the results of your fact-finding with us to avoid the client being asked the same question twice
5. “Aren’t second charge fees expensive?”
It’s a common misconception that second charges are costly. Though this was the case in the past, both fees and interest rates have fallen dramatically, especially since the MCD.
But it’s important to make clear to your clients that, because these loans are secured and have lower legal priority than a conventional first charge, they do carry higher interest rates in line with the bigger risk taken by lenders.
On the other hand, unlike with first charges, clients often have the option of not paying upfront for valuation fees and other costs.
6. “What’s the paperwork like?”
Because second charges are regulated under the same regime as first charge mortgages, the paperwork requirements are fairly similar. There shouldn’t be much new or different you need to learn, though there will be an application form and declaration form to complete (which not all first charge lenders will have). But when Vantage is providing the advice to your client, we’ll take responsibility for getting the compliance right. So that’s a weight off your shoulders..