Despite the second charge mortgage market getting off to a flying start in 2019, with volumes up 18% in January, compared to the same month in 2018*, there are still some misconceptions that linger around this form of lending.
So, what are these misconceptions?
Myth 1: “Remortgages are cheaper than a second charge”
Whilst first charges generally offer lower monthly repayments, a second charge could offer a cheaper alternative to your customers who would prefer to take a loan over the shorter term. A remortgage stretches over the remaining first charge mortgage term, whereas customers taking out a second charge can choose a term from as little as three years. Paying the loan over a shorter period usually reduces the interest paid and therefore the total amount repayable (although the monthly repayments will be higher). And whilst your customer could also repay their remortgage early, they are likely to incur early repayment charges (ERCs), whereas many second charge lenders, including Shawbrook, offer no ERCs, which will also impact the total cost of the loan.
Myth 2: “Remortgages are quicker to process”
The underwriting requirements are no more, and sometimes less, for a second charge mortgage, so there is no reason why the process should take longer.
If you are unsure of the advice and/or packaging requirements associated with a second charge, and believe this may delay your customer’s application, you could always refer your case to a broker who will work the case for you.
Alternatively, if you belong to a network or mortgage club that is on our panel (and you have registered with us), submit your case directly and utilise the services of your dedicated BDM or the Broker Support Team (see our Place Business page for more details).
Myth 3: “Second charge mortgage rates are too high”
Whilst it’s true that second charge mortgages do tend to attract more expensive interest rates than a first charge, they aren’t as high as they used to be**, with the cheapest rate across the market now starting from 3.57% (variable – accurate as of 28.03.19). The reason why rates tend to be higher is because the risk to the lender is greater than that of a first charge. However as mentioned above, despite rates being higher, the overall cost of the loan may be cheaper as customers taking a second charge can take a shorter term or repay their loan early without ERCs and therefore pay less overall.
Myth 4: “Second charges are too complicated to process”
Second charges are regulated under the same regime as first charges and therefore have similar requirements.
Solutions can therefore be sourced for a second charge in the same way as a first charge mortgage i.e. via a sourcing system. Many sourcing systems have API links, which means you can transfer all the information already keyed through to the lenders portal directly from your search, making the process quicker and easier for you.
Whilst Shawbrook does not offer API links to sourcing systems just yet, our Online Mortgage Portal (DJ), designed with brokers in mind, offers a 100% online application to submission process and you can track the case all the way through. If you’re still struggling however, you could always employ the service of a broker to source a product and package a case for you.
Myth 5: “Second charges aren’t in my scope of service; therefore, I don’t have to recommend one”
Whilst the FCA does not require firms to broaden their scope of service to include second charge mortgages, if an existing mortgage holder wishes to borrow more, the rules require that you make the customer aware that other forms of borrowing are available that may better suit their needs. You do not have to provide advice on the suitability of these alternative options, however if a second charge mortgage does offer a better solution for your customers you could introduce the business elsewhere to someone who can.
Hopefully this article has dispelled some of the myths around second charge lending and you can start to see why you should be considering this form of lending for your customers. Second charge lending is a growing market, with 23,529 new agreements*** issued in 2018, so as well as providing a great alternative to a remortgage, it also presents an opportunity for you to grow your business.