The second charge mortgage market is evolving quickly, particularly when it comes to lending on buy-to-let properties and equitable charges.
An increasing number of landlords are choosing to raise capital with a second charge on a buy-to-let property and there is a growing range of options for clients, even where the first charge lender declines their consent for the registration of a second charge.
The three most common reasons for a second charge on buy-to-let property that we encounter are to release equity to grow a portfolio, make improvements to the buy-to-let property or to fund improvements on the client’s own home. A lot of landlords use their investment property to fund improvements on their own home as they can cover the cost of the extra borrowing from the rental income they receive.
We also work with a lot of landlords who have really attractive lifetime tracker rates with lenders such as Mortgage Express, that are no longer lending and therefore do not provide consent to register a second charge against the property.
Ordinarily, this would limit a landlord’s ability to raise capital on the property without remortgaging and losing their existing interest rate. However, we now have access to increasingly competitive second charges where the lender registers their charge as an equitable charge, rather than by a second legal charge.
This means the lender does not take a legal stake in the property but instead is given the right for a judicial process of recovery, which is why an equitable charge can be used where the first charge lender declines their consent to a second charge being registered.
While there are a limited number of lenders available, second charges that are arranged by way of an equitable charge are available for loan amounts up to £50,000 and a maximum loan-to-value of 65 per cent. This can prove more economical for some landlords than releasing equity through remortgaging the entire borrowing onto a more expensive rate.
For example, we recently worked with an introducer who enquired about a case where the client was looking to raise an additional £30,000 on a buy-to-let property for home improvements. The property had a value of £600,000, with an outstanding mortgage of £310,000 on an interest rate of 0.7 per cent above Bank of England base rate for the whole of term.
The applicant was able to raise the additional funds by remortgage. However, this would involve losing the low lifetime tacker currently in place and it was not an attractive option for the client, given his currently low monthly payment. In addition, when we approached the existing mortgage lender, it declined to provide consent for the registration of a second charge.
We were, however still able to provide a second charge mortgage against the property by using a lender that would allow an equitable charge to be used.
This loan was secured at an interest rate of 7.29 per cent and allowed the client to retain the low interest rate on their first charge whilst releasing the funds they required to complete their home improvements, which was ultimately more financially attractive than shifting the whole balance on to a new rate.
Equitable charges are not only available for second charge mortgages on buy-to-let properties; they can also be used for residential purposes.
With an equitable charge, legal consent is not required by the first charge lender, which speeds up the application process.
This also makes it a good choice for leasehold homeowners with a very short lease who want to borrow funds to extend the lease on their property.
Darren Perry is head of second charge mortgages at Brightstar Financial