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November 2020 |

Tony Marshall: The second charge revival

Tony Marshall is managing director of Equifinance

To say that this has been a testing period for the second charge sector, as well as the whole lending market, would be an understatement. The initial lockdown resulted in valuers being unable to attend property valuations, the virtual shut down of the Scottish land registry, customers being allowed to defer payments on all secured lending for three to six months, the uncertainty regarding going back to work for employees on the furlough scheme, and the additional concerns regarding those industries that appear to be vulnerable.

All these issues created an uncertain environment, which resulted in a curtailment of lending for many. For us, it meant the complete removal of our products from the market, given that we were unable to make credit decisions with any degree of certainty.

Having met that challenge – and with the payment deferral scheme drawing to a close, valuers able to go about their work again, and an overlay to our underwriting criteria to mitigate the perceived risks in the new environment – we are back.

The main difference between the first and second charge sectors is that the former has recovered – a feat which the second charge sector has not yet matched. With property purchase a dominant force since the end of the first lockdown, helped by the stamp duty holiday, second charge loans have taken a back seat in the everyday considerations of mortgage brokers.

However, it is time to reset and remind the intermediary sector just why a second charge mortgage provides such a strong option for capital raising customers.

As new purchases continue to grow, and overburdened first charge lenders and conveyancers try to cope with the flood, there are likely to be many disappointed buyers who don’t complete in time for the end of March stamp duty deadline.

These buyers are likely to look instead at refurbishing their existing properties, and those whose hopes of a remortgage seem unlikely to happen for a while because of the delays will start to look for alternative funding. Advisers should be aware that a second charge solution is within their grasp.

The key determinant in any situation involving client advice is not to prejudge the solution until there is a complete understanding of the client’s circumstances. While both remortgage and second charge options do provide the funding required, the question that should be asked is whether the choice is actually the best one for the client.

Each method has its merits and it is vital – as second and first charge have become effectively the same thing, as far as regulation is concerned – that advisers can discern where one method is more appropriate than the other.

It is also vital, now more than ever, that customers have all the facts regarding potential methods of funding procurement. The acid test is not about what the adviser is comfortable recommending, but that the final advice – whether for a remortgage or second charge – is led by the evidence collected at the factfind stage.

For those of you who might be new to second charge lending, please consider the following typical examples of when a second charge may be a more viable option to a remortgage.

When your client:

-is already on a competitive mortgage rate

-is tied into their mortgage with heavy redemption penalties

-has an interest-only mortgage and further borrowing is restricted by the first charge lender

-has a credit status that has changed since their mortgage application

-needs early settlement flexibility

-needs to raise capital for a non-traditional purpose

-is unable to obtain a remortgage or further advance

-requires speed of funding due to automated valuations

-has experienced a recent change in their employment

Of course these are just pointers, but understanding when a second charge loan is the more appropriate choice is a crucial skill.

Second charge mortgages provide a vital alternative for capital raising customers, and as a lender which has developed its business through the intermediary channel, we are keen to remind brokers of its many virtues.