As a specialist finance distributor, one of the products we offer here at Enterprise Finance are Second Charge mortgages. But we often hear similar soundbites from brokers who aren’t completely sure about these increasingly popular loans. Here are our responses to six of their common concerns:
1. “I’m not 100% clear on second charge mortgages”
Not completely sure of the facts when it comes to second charge mortgages? You’re not the only one. Brokers often tell us they don’t fully understand the details. And if you’re new to mortgages, you’re probably still trying to get to grips with first charge mortgages.
Today Second Charges offer competitive rates at a small premium to first charges. With an average LTV of 59%, lending is prudent and based on full affordability and income checks. Plus they’re MCOB-regulated and fully transparent, with clear terms that Treat Customers Fairly (TCF).
Mainstream borrowers take out second charges for a range of reasons. For example, they’re often used for tax debt repayment, home improvements, debt consolidation, second property deposits, school fees or business finance. Borrowers might be in prime credit (with equity in their properties), be self-employed, ‘stuck’ in their first charge or credit-impaired.
2. “I don’t know when to recommend a second charge”
Brokers often say they’re not sure when a second charge could be a suitable capitalraising alternative to a first charge. As a result, they could be losing out through missed opportunities.
It’s also problematic in light of the Mortgage Credit Directive (MCD), which came about in 2016. The MCD requires mortgage advisors to make borrowers aware Second Charge mortgages are an option and could be in the best interests of their clients. But if you’re not completely confident about what they can be used for, this can make things difficult.
So when might you think about a second charge for your client?
The most obvious scenario is when a first charge just isn’t an option. Perhaps the client is self-employed and lending criteria have tightened since they got their first mortgage. Or maybe they’re at the salary multiple limit, credit impaired, or need the funds fast.
There are other situations where a second charge might be suitable too. For example, sometimes they’re just less costly than remortgaging – particularly if your client will be heavily penalised for early repayment.
3. “I don’t know how to place a second charge”
If you don’t know where to start, it can be daunting to place a second charge mortgage for the first time. But it’s not as difficult as you might think. Let’s look at the six stages of placing a second charge by working in partnership with a specialist finance distributor like Enterprise Finance:
Stage 1: client enquiry
First you need to listen to your client’s capital-raising needs and review the first and second charge options. If you feel a second charge would be the best option, refer the client to Enterprise. Tell them you’re passing them to a specialist finance distributor.
Stage 2: advice (initial contact with Enterprise)
At this point, Enterprise will usually work directly with your client to take them through the advice process. Our first tasks will be to identify the best second charge product on the market, carry out initial suitability assessments and go through the indicative terms with the client. But don’t worry, we’ll keep you in the loop as much as you like.
Stage 3: advice (fact-finding and sourcing)
Fact-finding is the next step in the advice process. We’ll ask the client to supply the specific information needed for a second charge mortgage (including a full income and expenditure calculation), and reassess their case based on this to ensure the client can afford the loan. (It helps if you share the results of your own fact-finding with us to avoid the client being asked the same questions twice). Then we’ll source and recommend the most suitable product to the client and go through the terms with them.
Stage 4: underwriting (processing)
Now the underwriting stage starts. We’ll send the paperwork to the client, including the ESIS and supporting document checklist. Once we receive everything back, we’ll instruct a valuation and obtain consent from the first charge lender.
Stage 5: underwriting (submission)
By this point we’re ready to fully underwrite the case and submit it to the lender. The lender reviews and underwrites it again, requesting any additional information or actions that are needed. 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 send out the binding offer and get this signed by the client before sending it to the lender. After we’ve had confirmation of completion, the client will receive the funds. We’ll then pay you (and your network, if appropriate) an introducer fee within 48 hours of being paid by the lender.
So, as you can see, all you really have to do is spot the opportunity and make the referral. The specialist finance distributor will then do a lot of the hard work for you.
4. “My clients are wary of second charges”
The way to address this is to be as clear and transparent with your client as possible. In plain English, explain why a second charge is the best solution to their problem and what to expect from the application process. This will help allay their concerns and increase the chances of everything going smoothly. It’s also advisable to:
• make it clear what documentation they’ll be required to provide
• explain how important it is that they’re transparent and give complete
• Ask any questions if unclear about anything
5. “I thought second charges were expensive”
It’s a bit of a myth that second charges are costly. Though it was true in the past, both fees and interest rates have fallen significantly since the MCD came into play in March 2016.
Having said that, it’s important to make sure your clients understand that rates are higher than with first charges. This is because the loans are secured and have lower legal priority than first charges, so they’re a bigger risk to lenders. However, rates start from just 3.65%.
On the other side of the coin, Enterprise give clients the option of paying all fees upfront for valuation fees and other costs, or adding them to the loan. So this is an advantage over first charges.
6. “I’m worried there’ll be lots of paperwork”
Paperwork has always been a challenge in the regulated mortgage world. At Enterprise, we’ve built into our IT systems both process workflows and paper trails (system-generated and recorded) for searches, sources and placement. Compliance is more likely to complete first time as a result.
But it’s important to remember that second charges are regulated under the same regime as first charges. That means the paperwork requirements aren’t actually that different, so there shouldn’t be much extra that you need to learn. And when Enterprise is advising your client, we take on responsibility for getting the compliance right. So that’s one thing less for you to worry about.