Second Charged Mortgages

by Mark Johnston

A secured loan is any personal loan that requires the borrower to provide the lender with some form of security.

Secured home owner loans are available in varying amounts; the amounts usually range from £10,000 to £100,000 and are repayable on a monthly basis.

There are a number of reasons why a secured personal loan or second charge mortgage may be appropriate, such as:

–          the existing mortgage lender will not offer any more money

–          borrowers have large early repayment charges on their current mortgage

–          since taking out the main mortgage the borrower has picked up some bad credit

–          the borrower needs money fast

In the case of secured loans, the security would be the borrower’s property. This is regardless of whether the property is mortgaged or owned outright.

Loans secured against a property that is already mortgaged are known as ‘second charges’.

Whenever credit is secured on a property, a charge is registered at the land registry. The mortgage lender will have the first charge on the property and the loan will have the second charge on the property.

Therefore when the property is sold, the first charge, the mortgage company, will be cleared in full before the second charge receives any money.

The second charge would then have access to any remaining funds up to the amount of the full outstanding balance of the second charge.

Although defaulting on a second charge loan can still ultimately lead to possession of a borrower’s property and, as such, it is therefore considered to be high risk.

Many mortgage intermediaries are still reluctant to get involved with secure loans. However, the market is changing and this is because they are beginning to realise that there are many occasions when a secured loan provides a superior funding solution to a re-mortgage.

It seems then that the ever tightening criteria of high street banks has resulted in the adaptation and evolution of secured loan products from specialist lenders to cater for this changing landscape.

Many landlords already use these loans to help increase their portfolios and renovate buildings for use in the rental market

These loans therefore present a huge opportunity for brokers to utilise this growing demand and offer these products to their clients.

Gary Bailey, director at Blemain Finance, said “I think the demand for second charges will remain strong. We are already seeing lenders settle in to niche areas of the industry, which I believe will continue more in 2012, and keep the market competitive”.

Due to the growing demand in secured loans the government has stated that second charge regulation should now be regulated by the Financial Service Authority (FSA). This is to ensure consistent standards of consumer protection and to also ensure that second charge lenders meet capital; requirements and other standards.

Therefore it is likely that the Financial Service Authority (FSA) will require second charge mortgage lenders to adopt similar business standards as those that are applied to first charge mortgage lenders.

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