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 800 in 2011, with similar figures predicted for 2012.
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 is still facing a funding issues. The lack of wholesale finance available to lenders has caused the market to be writing less than a tenth of the business it was writing two years ago, with little sign of recovery.
Regulation - The second charge mortgage market is highly regulated via the OFT under the Consumer Credit Act 1974. The Government is currently consulting on transferring consumer credit regulations to the yet-to-be-formed Financial Conduct Authority, a transfer which we expect to happen from April 2012.
Second-charge mortgages are also covered in the FLA’s binding Lending Code, supplemented by Good Practice Guidance. 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 with customers facing financial difficulties.
The European Union is expected to reach agreement on the Mortgage Directive in late 2013. Second charge lending is within scope.
- UK Industry briefing on the draft report on the proposal for a Directive on Credit Agreements Relating to Residential Property
- Eurofinas observations on the European Parliament's draft report on the European Commission?s Proposal for a Directive on credit agreements relating to residential property
- FLA Good Practice Guidelines for Second Charge Mortgages - Helping Customers with Payment Difficulties