Why aren’t all mortgage brokers exploring second charge as a possible solution for their clients?
Ask those who have so far chosen to ignore the market this question and the answer you’ll probably get is, more often than not, a remortgage is the better choice. So adamant are they in this belief that they’ve chosen to relinquish their status as an independent mortgage broker, eschew the option of referring seconds clients to a specialist and make it clear to their clients that secured loans are in no way part of their offering. But are they right? Can it really be that these brokers are never coming into contact with borrowers for whom a second charge might be a good solution? Or, perhaps, is it more likely that some brokers are failing to identify opportunities for second charge mortgages? If the latter is the case, Loan Introducer is on hand to help. We spoke with some of the leading master brokers in the sector to find out some scenarios when second charges saved the day.
Debt problems and adverse customers
Earlier this year a study by Aviva revealed debt for families in the UK is a huge problem. The Family Finances report found that average household debt now stands at £13,520. And clients who are in debt can often find second charge loans an effective tool for consolidating what they owe, getting back in the black and repairing their credit scores – thus allowing them to access mainstream lenders – as these case studies demonstrate.
The couple looking to cut outgoings
One couple Clever Lending helped had a disposable income of £75 and debts costing in the region of £800 per month.
“Having already been declined by a high street lender they wanted to know what a broker could offer them,” says Sam Kirtikar, managing director, Clever Lending. “They had a current mortgage of £99,388 with 16 years remaining, their monthly cost was £643 per month on a rate of 3.89%, fixed until December 2016. Their house was valued at £230,000 and they had debts totalling £23,164, costing £833 per month. All of this meant they had a total monthly cost of £1,476.
“The broker considered a number of options, including debt management, IVA, mortgage and a secured loan. The customer’s main focus was that they did not want to further affect their credit file, so an Individual Voluntary Arrangement, that registers you on the insolvency register, wasn’t an option they wanted.”
Kirtikar says a mortgage would have been an option but was ruled out due to the fact their current fixed rate was very good and had an early repayment charge of £3,442 and they had some impaired credit. Using a second charge mortgage instead, borrowing £23,200 over 16 years at 10.9% (£249 per month) to pay off the debt, the couple were able to reduce their monthly payment by £584.
“The key to this case is that the credit history will begin to repair itself by maintaining payments” says Kirtikar. “When the customer reaches December 2016, we will look to reengage based on the cleaner credit file and new finance options.”
The borrower with the bankruptcy charge
Though certainly an advisable route for some, bankruptcy can have some severe consequences but second charge can help – as this case study from Enterprise Finance explains.
“Mr. Smith was facing bankruptcy, after an action brought by HMRC for unpaid taxes,” says a spokesman for the master broker. “He needed £40,000 to clear the debt and remove the bankruptcy order. He had a £170,000 property with a £32,281 outstanding first charge mortgage. Clearly he had significant equity in the property, but was unable to release that due to his bankruptcy status. Enterprise Finance was able to arrange a £40,000 second charge mortgage with Spring Finance to clear the debt. Moreover, Enterprise was also able to co-ordinate with an independent solicitor, paid for by Mr Smith, who was authorised to accept the funds, and clear both HMRC debt and bankruptcy. This case demonstrates the flexibility that second charges bring as alternative ways to release property equity, when first charge options are unavailable. It also shows how master brokers like Enterprise and alternative lenders like Spring can adapt to the complex circumstances surrounding such a case.”
The client keen to return to mainstream lending
Clients with serious adverse credit obviously struggle when it comes to accessing finance, and the quicker they return to mainstream lending the better. In some cases a second charge can enable them to clear debts more quickly, which stops them from spiralling, and crucially enables the client to get on with rebuilding their credit score.
“A broker recently contacted us about a client that had been declared bankrupt last year over a business debt of £32,000,” says Ian Scarrott, new business manager at specialist distributor, TFC Homeloans. “The total cost of clearing all liability to the insolvency, if it had run its course, was estimated to be around £60,000 once fees to Trustees were paid.
“Rather than the client completing the bankruptcy and then trying to raise the money
through an adverse credit remortgage, we quickly arranged a secured loan for him.
“We can raise money for clients even if they are insolvent, and the funds are paid directly to the creditors. As long as every single creditor is paid off the bankruptcy is not only satisfied but the court can “annul” the bankruptcy. This means the insolvency is removed from the register as if the client was never made bankrupt, so it has obvious advantages to the client.
“The client now has an affordable monthly payment on a secured loan and no longer has any record of a bankruptcy on their credit record. Most importantly we saved them from having to pay the full costs to the Trustees, saving tens of thousands of pounds.
“Plus, because there are no Early Repayment Charges on the loan, the client can remortgage to a mainstream, cheaper deal as soon as his score increases (which will be much quicker without the bankruptcy on his record).”
Refurbishments are one of the primary reasons people borrow money but it’s not always a simple case of a bit of extra cash for some DIY. Indeed refurbs can get tricky – particularly where a mortgage lender is a concerned – as these case studies show.
The buy-to-let in need of some work
Sometimes landlords buy a property to let and discover it needs more work than they anticipated in order to let it out. They need quick access to funds but you usually need to have held a buy-to-let property for over six months before you can remortgage. A second charge mortgage means you can get the work done and move paying tenants in as soon as possible.
“We recently worked on a case where the broker’s client had recently purchased a buy-to-let property which he assumed was ready to let,” says TFC Homeloans Scarrot. “He then discovered there was more refurbishment needed to the property than originally expected.
“The work wouldn’t take long but the landlord didn’t have the funds to cover it and his new lender wouldn’t help. The current mortgage had Early Repayment Charges attached so it would have cost thousands to remortgage. Plus most buy-to-let lenders will only accept a remortgage application on a property you have owned for six months. The landlord didn’t want to wait that long.
“We arranged a second charge loan secured on the buy-to-let property, taking the LTV up to 65% (although we can arrange finance up to 85%).
“Despite the clients having a low credit score and some minor adverse credit we were able to complete and fund the loan at a rate of 7.15% within eight days. The landlord quickly got the work done to the property and three weeks later his tenants moved in.”
The home improvement
“We received an application for a loan for home improvements,” says Nicola Mooney, head of secured, intermediary and business finance, at Freedom Finance. “Whilst the application was being processed the applicant worked with the land registry and his solicitor to split the title on his land. His future plans were to renovate his existing property and to sell it, his mortgage and secured loan were secured on this title.
“The sale of his existing property would allow him to build a new house on the land with the new unencumbered title, enabling him to speed up the process to be mortgage free.”
Perhaps one of the most well-known uses for a second charge over a remortgage is where the borrower doesn’t want to or, indeed, is unable to consider a remortgage.
The client reluctant to remortgage
“A common scenario is where a prime client has an existing mortgage on a very low base rate tracker that they want to keep hold of,” says TFC’s Scarrott. “The second charge mortgage allows them to hang onto their incredibly low rate for the bulk of their borrowing, while raising additional funds for whatever reason.
“For example, we recently had a broker approach us with a client who had a £520,000 mortgage on a property currently valued at £940,000. Her mortgage is on an extremely low base rate tracker and she is paying only £543 a month on an interest-only basis.
“Obviously she didn’t want to let go of that rate but she did need to raise £50,000 to fund a deposit on a buy-to-let property. She also didn’t want to have to convert her mortgage to a repayment deal as she is happy with interest-only and has a robust plan in place to clear the mortgage in the future.
“Her latest SA302 shows annual earnings of £84,000 and her current lender won’t offer a further advance because of the high income multiples involved. Most other mainstream lenders are saying the same or they are insisting she convert the mortgage to a repayment deal.
“A second charge loan offered obvious benefits to this client. We helped arrange a £50,000 second charge loan at 4.5% over 20 years. This costs the client £299 a month including all set-up costs, such as fees and valuation.
“She gets the additional borrowing, at a low cost, and crucially doesn’t have to give up her extremely low first charge mortgage rate to do so.”
The client with nowhere to go
Of course it’s not always that borrowers don’t want to remortgage away from their current rate, often they are unable to. The mortgage market is a very different place to what it was some five or ten years ago. Criteria changes have meant some borrowers will have nowhere to go if they give up their current deal.
This was the case for a recent customer of Promise Solutions who wanted to raise some funds but had a problem – an interest-only-mortgage-shaped problem.
“Most parents would like to be able to help their children or grandchildren out financially, particularly when it comes to raising a deposit for a first home or paying for university fees,” says Promise Solutions’ Walker. “Many look to remortgaging as a way of raising the money needed to do so but that’s not always possible. We recently had a client who was unable to remortgage because he had an interest only loan and, as we all know, such loans are pretty hard to come by in today’s market. A second charge loan was used allowing the borrower to retain his interest only loan while raising the necessary funds to gift to his children.
Increased regulation and the hangover from the last few years have meant for all but the vanilla, prime, shiny borrowers there can be some hurdles to jump over. In some cases circumstances that a lender classes as ‘unusual’ can lead to a borrower being declined – even when those circumstances are not exactly rare.
The employee on probation
“I think a common complaint of the first charge market is that it is somewhat dated in its criteria surrounding the employment status of borrowers,” Steve Walker, managing director, Promise Solutions. “We live in an age where a huge proportion of society is now self employed yet many mainstream lenders have not reacted to these changes. In this instance the borrower was employed and therefore should have fitted mainstream lenders’ criteria however as he was in a fairly new role he was still on probation and as such was turned away. The client had good previous history in a similar role and our broker was able to offer a second charge despite the fact the employment was not technically permanent at that stage.”
The employee on commission
Of course the way in which a borrower earns money is not just an issue in terms of lenders’ criteria and whether or not their application will be accepted – it can also have serious affects on how much a borrower can access. Borrowers who work in commission based roled can find themselves in difficulty when trying to prove their steady earnings. Many sales roles have a low basic salary but, on target earnings (OTE), the employee could earn significantly more. Positive Lending’s Anna Bennett explains how a second charge came to the rescue for one commission-based earner.
“A successful car salesman, this client’s overarching requirement was to reduce his monthly outgoings by repaying his unsecured credit card debts,” explains Bennett. “The client earnt nearly £95,000 OTE but, even though he had been a consistent high earner for 8+ years, his mortgage company declined his further advance due to their affordability model; the client’s salary consisted of a low basic wage (c. £15,000) and a larger proportion of commission earnings. Positive Lending has access to a number of lenders who can consider all types of income, they are not restricted to simply using a basic salary model. Having reviewed his application carefully, conducting the usual affordability and stress tests, Positive found the client a secured loan that enabled him to repay his unsecured debt and lower his monthly outgoings by £800 pcm. The client, and his broker, understood that the borrowing would now be secured on his property and was happy with this as it achieved his main requirement of reducing his outgoings.
The client with the rights issue
When Freedom Finance received an application from a client looking to undertake home improvements, but without permanent rights to reside, a second charge came to the rescue.
“We received an application for a home improvement loan,” explains Freedom Finance’s Nicola Mooney. “The 1st applicant had severe adverse credit due to work permit issues and the 2nd applicant didn’t have full rights to reside, they were both from Ghana. Despite the 1st applicants adverse credit (there was a perfectly valid explanation around this) the lender took a common sense approach and we managed to get it approved on the 1st applicant only as we weren’t relying on the 2nd applicant’s income.