Second Charge Mortgages
Most consumers refer to second charge mortgages as ‘second mortgages’. It is simply a way of securing a loan, using any residual value, or equity, in the property as the security. Second charge loans are often used for reinvestment back into the property, such as home improvements; but the money can be used for anything the borrower wishes.
What are the risks in using the home as security?
Second charge mortgage lenders are committed to helping customers if they fall into financial difficulty. Possession is only taken as a last resort, once all other reasonable alternatives have been exhausted. Lenders will always work with customers to find a suitable solution when they are made aware of problems with repayment.
This approach is reflected in the low level of repossessions, around 1,450 in 2009. The first quarter of 2010 saw repossessions drop by 33% from the previous year, 261 properties being taken into possession by second charge lenders.
The FLA’s views
We believe that second charge mortgages have an important role to play. They are flexible, can be arranged speedily, rates of interest are competitive and there are minimal charges on early redemption.
Second charge mortgages play an important and valuable role for many consumers, helping them to consolidate existing debts at lower and more affordable rates of interest. This provides real support for customers who may be struggling with their finances.
Funding and support - The market faces a funding crisis. The lack of wholesale funds available to lenders has caused the market to be writing less than a fifth of the business it was writing two years ago, with no sign of recovery. If funding continues to be restricted in this way, it could have an adverse effect on the level of arrears and possessions in the future, as customers would be unable to reschedule their debts.
We believe that support for Mortgage Interest (SMI) should be payable on all second charge mortgages (as it is for first charge mortgages). This would have a real impact in alleviating mortgage arrears and preventing possession.
Regulation - Should regulatory responsibility be moved from the Office of Fair Trading? We believe not. The second charge mortgage market is already highly regulated via the OFT under the Consumer Credit Act 1974.
It is also regulated by the FLA’s binding Lending Code, supplemented by the industry’s new Good Practice Guidance issued with government approval last year. Together, these ensure that borrowers with debt problems are treated fairly and sympathetically and that every attempt is made to agree an acceptable repayment arrangement.
