Second charge mortgages
“Second charge mortgages” (also known as “Secured loans”) are a specialist form of consumer credit that is secured against the home of a borrower who already has a mortgage. The loan is secured by registering a charge with HM Land Registry that is subordinate to the “first charge” that was registered by their existing mortgage lender.
Second charge mortgages are regulated by the Financial Conduct Authority (FCA) under its Mortgages and Home Finance: Conduct of Business sourcebook (MCOB).
Though subject to the same regulatory regime, they differ from first charge mortgages in a number of ways, resulting in their being a more specialist product.
Second charge mortgages are used for a variety of purposes, including:
- Loan consolidation
- Renovating / extending / improving property
- Helping a family member to buy their first home
- Providing investment capital for a small business
- Paying an unexpected expense (for example a larger than anticipated tax bill)
- Paying for a one-off large item – which could be a luxury such as a honeymoon
- Easing a period where cash-flow is irregular (e.g. for self-employed consumers).
Second charge mortgage repossessions occur are rare. Fewer than one in ten thousand second charge loans ends in repossession. The FLA publishes regular repossession figures: In the twelve months to June 2018 the rate was 0.09%.
There are two FLA groups that bring together second charge lenders and some of our associates:
- The Secured Lending Group discusses issues relating to second charge and the wider mortgage market.
- The Mortgage Compliance Working Group is specifically focused on regulatory matters.
Secured lenders are also represented on the CFD Management Committee and cross-divisional groups such as the Regulatory Reform Working Group.
Second charge mortgages have been regulated by the Financial Conduct Authority (FCA) since 2014. Following the Mortgage Credit Directive (MCD), since 2016 they have been treated like any other mortgage for regulatory purposes. They are therefore subject to the FCA’s Mortgages and Home Finance: Conduct of Business (MCOB) sourcebook. They are also required to pay heed to TR16/4: Embedding the Mortgage Market Review: Responsible Lending Review and other FCA publications.
In 2016 the FCA undertook a market-wide thematic review of how firms in the first charge market applied the responsible lending rules introduced in April 2014 following the Mortgage Market Review. In 2017/8 they repeated the exercise with second charge lenders. Following visits to eight lenders, the FCA published a Dear CEO letter outlining its findings and calling on members to respond. They also attended the FLA’s Secured Lending Group meeting in June and gave a briefing for members (see June 2018 Secured Lending Group minutes).
We expect the FCA to undertake a similar examination of practice among intermediaries, and to revisit second charge lenders for a follow-up, probably in 2019.
Second charge lenders are required to submit Mortgage Lenders and Administrators Returns (MLAR) and Product Sales Data (PSD) to the FCA. MLAR and PSD001 should be submitted quarterly; PSD007 biannually. It is important that those submitting the returns consider the appropriate rules.
For more details on lenders’ responsibilities please consult the minutes of the 24 July 2018 meeting of the Mortgage Compliance Working Group.
In December 2016 the FCA announced a market study into mortgages. The interim report was published in May along with a call for input from the sector. The FLA responded to the market study in July. A final report is expected in Q1 2019.
Second charge mortgages are nominally not in scope for the MMS. However, as second charge mortgages are subject to MCOB, it is inevitable that any changes made as a result of the MMS will affect second charge lenders. Furthermore, as the FCA states that second charge lending is part of the same market as first charge mortgages, we have argued that both first and second charge lending should be considered together as part of the MMS.
The MMS highlights a four areas where the market could work better:
- Navigating the market is currently difficult – many customers miss out on significant savings on the cost of their mortgage
- Tools to help consumers choose, and intermediaries to source, the best possible mortgage are currently of limited effectiveness
- Choice of intermediary matters, but there is little support available to help consumers choose an intermediary
- There are barriers to switching for some consumers (i.e. “Mortgage prisoners” who are victims of changes in circumstances since they took out their mortgage – often as a result of regulatory change).
On 26 June 2017 the crossbench peer Lord Bird introduced the Creditworthiness Assessment Bill. This Private Members’ Bill seeks to amend FSMA to require the FCA to require firms carrying on regulated credit-related activities and connected activities (including entering into or varying mortgage contracts) to take into account rental payment history and council tax payment history when assessing a borrower’s creditworthiness.
There are a number of issues with the proposal. The FLA has produced a briefing for external stakeholders. You can get a copy from Ed Simpson, Head of External Relations (email@example.com).
Regular updates from the FLA
The FLA provides email updates on significant issues. We also produce a newsletter for members called Mortgages and Housing News. It goes out eight times a year. Past copies are available at https://www.fla.org.uk/index.php/consumer-finance/second-charge-lending/second-charge-lending-emails/.
If you would like to be added to the distribution list for either the emails or the newsletter, please contact firstname.lastname@example.org.
The FLA and AFB are jointly hosting a Secured Lending Workshop on Monday 12 November 2018. The aim of the workshop is to bring together lenders and specialist brokers to discuss regulation and policy issues. The meeting will take place at the Marriott, Forest of Arden, Maxstoke Lane, Meriden, Birmingham CV7 7HR.