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. Final figures for 2010 will be published in February, but the FLA currently expects around 950 repossessions in total from FLA member second charge mortgage providers.  

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 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 little 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.

Regulation - The second charge mortgage market is highly regulated via the OFT under the Consumer Credit Act 1974. This may change in the next few years - the Government is currently consulting on transferring consumer credit regulations to the yet-to-be-formed Financial Conduct Authority.

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.  

EU Matters

On 31 March the European Commission (EC) published a draft Mortgage Directive. Second charge lending is within scope. The FLA and other UK trade bodies share a number of concerns:

• The creditworthiness assessment provisions could give rise to gaming and litigation by consumers because lenders would need to provide detailed, technical information. 
• Under the proposed “passporting” rules, a non-UK credit intermediary could enter the UK market based on the rules applicable in the entrant’s Member State, which might be laxer. 
• The EC has endowed itself with powers in a number of areas to amend legislation without recourse to scrutiny by MEPs and Members States.

We have strong backing from HM Treasury on all of these issues.

The FLA has written to MEPs on the Economic and Monetary Affairs Committee raising concerns on the creditworthiness assessment obligations and delegated acts (the briefing note is attached). We have also contributed to a UK cross-industry position and a Eurofinas paper (both attached).