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Mortgage prisoner? How a second charge loan could help

Those trapped in interest-only mortgages and older borrowers may benefit from the finance options provided by second charge loans.

Mortgage prisoner? How a second charge loan could help

Interest-only mortgage prisoners and older borrowers who have been locked out of the lending market are turning to ‘second-charge loans’ to access cash.

The City watchdog Figures from the Council of Mortgage Lenders show there are currently 2.8 million people with interest-only loans.

Unfortunately, many of the interest-only borrowers, who only pay off the interest but not the capital of their mortgages each month, find themselves locked out of borrowing as their banks and building societies insist any remortgaging be done on a repayment basis, where they have to pay back both the capital and interest each month.

Switching to a repayment loan means their monthly mortgage payments increase, said Marie Grundy, finance expert at V Loans, but many borrowers do not want to or are unable to pay the repayment loan costs.

Other lenders refuse to extend mortgages on interest-only loans without seeing proof of a plan to repay the total amount of the loan at the end of the mortgage term.

‘We get borrowers coming to us because [they have gone to their current lender] and they say you can have the money but you have to convert to a repayment mortgage and some will not consider a switch or a remortgage without proof of payment,’ she said.

‘Second charge loans are perfect for raising money in these circumstances.’

A second charge loan – or second mortgage as they’re also known - works in the same way a mortgage and is secured against your home, but as the name suggests it comes second in line to a ‘first charge’ mortgage.

Grundy said loan rates are at an all-time low of 4.05% above base rate, making it a good time to take out a loan without disturbing your current mortgage rate.

While most people used to use the loans, which can have a term as long as a mortgage but as short as five years, for debt consolidation, Grundy said the main reason given for taking out a second charge loan is now home improvement. There are also a number of people raising cash for buy-to-let properties.

There is another swathe of people Grundy believes can benefit from second charge loans; those who have been locked out of the mortgage market because of their age.

The introduction of the ‘mortgage market review’ saw lending criteria tighten dramatically and many people in their 40s found they could no longer remortgage due to the mortgage term taking them into retirement.

‘The average age [of someone taking a second charge loan] is early 40s,’ said Grundy. ‘That age group is finding it difficult to obtain mortgage finance because they need a longer term and that is taking them into retirement.’

Although the idea of second loans may sound like a good solution for those locked out of mainstream lending, the memory of the financial crisis is still reasonably fresh in peoples’ minds.

Grundy denied that increasing borrowing on the back of property was reminiscent of the boom times, pre-crash and argued that the lending criteria is now far more stringent.

‘We are not in the business of lending to people who cannot pay back the loan and they will be tested under the same rules [as mortgages] and we incorporate a stress test,’ she said.

She added that second charge loans have always looked at income and expenditure, which the mortgage market review is only now requiring mortgage lenders to do.

Dean Mirfin of Key Retirement, which acquired V Loans last year, said his company undertook a review that showed one in 10 of those remortgaging their properties could get a better deal through a second charge loan. He said those who have been turned down for a remortgage will often be accepted for a second charge loan.

‘It is not just about [loan] rates,’ he said. ‘There are a lot of nuances for second charge loans. You will get people turned down for remortgaging or further finance but be accepted for second charge loans,’

Grundy said the ability for second charge loans to offer finance where banks and building societies couldn’t is down to individual underwriting.

‘[People] come through where they have failed the credit score [for a traditional lender] and there is no obvious reason why, they have made all their payments…so rather than use a credit score pass or fail, we will look at their ability to pay individually,’ said Grundy.

‘We don’t have a tickbox mentality…so we are well placed to serve [for example]] older borrowers.’

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