Second charge loans have been around for a while, but the flexibility they can bring when it comes to financing could result in this form of loan growing in popularity, in a more regulated buy to let environment.
The Prudential Regulation Authority (PRA) rule changes in 2017 have resulted in stricter lending criteria for many buy to let borrowers.
Data released by the Finance & Leasing Association showed that second charge mortgage business increased in May 2017 by 26% in value and 29% in volume, year on year.
2017 also saw six consecutive months of growth in second charge mortgage new business volumes, before the market fell marginally in September, along with the rest of the mortgage industry.
So what is a second charge mortgage?
A second charge loan enables you to use any equity (the difference between the value of your property and the amount that is outstanding on your loan) as security against another loan, without changing existing borrowing against the property.
Whether you are looking to raise funds for home improvements, as a deposit for another property, to extend a lease on a property or for debt consolidation purposes, without affecting your current mortgage, then a second charge loan could be one option.
Second charge mortgages are not suitable for everyone wishing to capital raise, but can offer a number of advantages, including:
- A typically faster application process than for a standard mortgage;
- Typically more lenient lending criteria;
- A second charge loan means you can keep your first charge, which can be very useful if you are repaying on a low interest rate or where other types of refinancing might mean you incur Early Repayment Charges;
- Mitigating the additional costs typically associated with remortgaging, such as transferring lenders and different interest rates and charges.
Before taking out a second charge loan it is always important to ensure that your existing mortgage lender will accept this type of financing.
James Briggs, National Sales Manager at Precise Mortgages has seen significant impetus for second charge loans in recent months.
“Second Charge Loans enjoyed continued growth in 2017. According to figures released by the Finance and Leasing Association towards the end of the year, the market grew by 10% between November 2016 and 2017, with borrowing estimated to be around £1 billion.
“The number of mortgage brokers and financial advisers offering Second Charge Loans is also growing. This is helping more customers to cost effectively raise capital on both residential and buy to let properties as more advisers recognise the viability of these products.
“Compared to recent years, the cost of borrowing, in terms of the interest rates available, has reduced significantly and in 2017 the appreciation for these products, from financial services intermediaries, was at an all-time high.
“In summary, I expect to see Second Charge Lending continue to go from strength-to-strength in 2018 and beyond,” he commented.
The buy to let market continues to evolve thanks to the raft of rules and regulations that have been brought in. Factor in the uncertainty of Brexit, continued rising inflation and the Bank of England’s hints of possible future base rate rises and it comes as little surprise that many lenders are looking to innovate with their loan products in a competitive market place.
That is why, with the tighter rules applied by many lenders to buy to let applications during 2017, second charge loans could increase in demand in the coming twelve months.
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Daniel Peacock