Misconceptions about second charge mortgages are common, with many people confusing them for high-interest payday loans or second home mortgages.
It doesn’t help that they are sold under different names such as:
- second charge mortgage
- secured loan
- homeowner loan
Second mortgages can be a good solution when you need to borrow extra cash, it is a type of loan secured against the value of your home, just like a normal mortgage. You borrow against the equity value of your home, which is the difference between the value of your property and any money you owe on it. A second charge mortgage can be arranged relatively quickly and used for major renovations or debt consolidation, among other things.
Our article What can you use a secured loan for? looks into this topic in a bit more detail.
For UK homeowners, it’s an alternative to taking out an unsecured loan or a remortgage.
What are second charge mortgages and how do they work?
Second charge mortgages are a type of secured loan, taken out using the equity you have built up in your property. Homeowners can use this additional borrowing power to consolidate debt, make home improvements or cover large unexpected expenditure.
How do you calculate equity? – You calculate equity by subtracting the total amount you owe on your mortgage from the value of your property. The remaining figure is your equity.
These loans are taken out in addition to your main mortgage, hence the term ‘second’ mortgage.
The second charge mortgage lender will place a legal charge on your property as security for the loan. This means that if you fail to make your repayments, the lender can repossess the property and use it to recoup the money owed. (What is a second charge on a property?)
Second charge mortgages are typically offered for a term of up to 25 years (though terms may be shorter or longer depending on individual circumstances) and interest rates vary from lender to lender. It’s important to remember that second charge mortgages will incur additional costs such as arrangement fees and early repayment charges so you should always make sure you understand these before taking out a loan.
Our article How many mortgages can you have? takes a look at how many mortgages can be linked to one property and can a borrower have as many mortgages as they want?
Further advances
A further advance is an extra loan that comes from your main mortgage lender. These can be harder to qualify for but are normally cheaper. It’s a good idea to compare a second mortgage with a further advance, as they have very different interest rates.
Remortgaging
At some point you will need to review your main mortgage, to renew your interest rate deal. Having a second charge in place makes this process a little bit more complicated. Our article Does a secured loan affect remortgaging? covers the main points to watch out for.
Are second charge mortgages regulated in the UK, and if so, how does this protect consumers?
Second charge mortgages are regulated in the UK.
The Financial Conduct Authority (FCA) regulates the consumer mortgage market in the UK and all second charge mortgage lenders must be authorised by them if they offer loans secured against a main residence. This ensures that a range of consumer protection measures are in place to ensure fair lending practices and protect borrowers from unfair contracts or fraudulent activities.
Furthermore, all second charge mortgages providers must abide by FCA regulations and guidelines that include conducting affordability checks on potential customers, ensuring their loans are suitable for each individual’s circumstances, providing clear information about loan terms and conditions, along with allowing customers to switch products or cancel their loan agreement if necessary.
In conclusion, yes – second charge mortgages are regulated in the UK by the Financial Conduct Authority (FCA). As such, anyone looking to take one out should always ensure that their lender is authorised by the FCA.
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FCA Regulated
When did second charge mortgages become regulated by the FCA?
Second charge mortgages have been regulated by the Financial Conduct Authority (FCA) since March 2016. The FCA regulates all loans secured against a home, including second charge mortgages and remortgages, to ensure that customers are adequately protected from exploitation and unfair practices. Many of the regulations adopted were based on those already used for first charge mortgages.
What mortgages are not regulated by the FCA?
Generally speaking, a mortgage or secured loan will be regulated if you live in the property being mortgaged. So this would mean that the following would not be regulated:
- Buy to let property
- Holiday let property
- Second mortgage on a holiday let
- Commercial property
- Serviced accommodation property
- Holiday home or second property
Any type of loan or credit agreement that is not secured against a property, such as personal loans, credit cards and other unsecured forms of borrowing, are not regulated by the Financial Conduct Authority (FCA). Instead, they are covered by the Consumer Credit Act.
Can I trust second charge mortgage lenders?
Yes. All lenders must be authorised and regulated by the FCA and are regularly monitored to ensure they are meeting all regulations.
The procedures for arranging a mortgage on your home are very strict and include detailed affordability checks.
There is also a Complaints Handling Procedure in place which homeowners can use if they have any issues with their lender.
Not on the High Street!
The high street lenders can’t help every mortgage customer and they prefer the simple, low-risk ones.
If your situation is a bit different or needs a more personalised solution then our brokers can help.
Expert advice, for all situations.
Second Charge Mortgages
It’s important to get expert advice when taking out a second mortgage as there are a lot of things to consider.
Bridging Loans
The most flexible of secured loans and often misunderstood. Bridge loans can be used in so many different ways and can be arranged super fast.
Complex Mortgages
A complex mortgage could be considered any situation that does not fit with the standard lenders. Typically this would be borrowers who have multiple income streams and/or properties of non-standard construction.
What does the FCA regulate?
The FCA regulates every aspect of second charge mortgages, from consumer protection to responsible lending practices. They also have the authority to investigate and take action against any lender found in breach of rules and regulations
The FCA has implemented measures such as affordability assessments, which ensure borrowers are able to meet repayments without causing financial difficulty. Lenders must also clearly explain all terms and conditions, provide copies of all documentation and inform borrowers about the risks associated with taking out a second charge loan. Because of this it’s a good idea to ask your broker what documents you will need for a secured loan application, to give you some time to obtain them.
In conclusion, secured loans are regulated in the UK by the Financial Conduct Authority (FCA) to ensure that consumers are adequately protected against unfair practices. It is important for homeowners to research their options before taking out a loan and to ensure they use a reputable, authorised lender. If you have any concerns about the second charge mortgage process, you should contact the FCA or your local Citizens Advice Bureau for advice and support.
Shop around and use a broker
Before taking out any mortgage, it is always advisable to shop around for the best rate and use an independent broker who can compare products from numerous lenders.
A qualified broker will also be able to provide impartial advice on the loan terms and conditions, along with any other related matters. This will help ensure that you are getting the right deal for your needs and circumstances.
Additionally, a second charge mortgage broker may be able to provide access to lenders not available on the high street or through a bank. This can open up more options to ensure you get the best deal for your individual circumstances.
Ultimately, it is important to do your research and find an authorised lender that is right for you. That way, you can be sure that your loan is in safe hands. Good luck with your second charge mortgage!
