The learning objectives for this article are to:
- Identify scenarios where second charge loans can be used
- Understand the difference in benefits between second charge loans and remortgaging
- Explain who homeowner business loans are for and why they might opt for one
Second charge mortgages are highly versatile products for property investors seeking flexible solutions to raise funds. In recent years, they have gained more prominence in the mortgage sector due, in part, to the Mortgage Credit Directive 2016. This mandates that whenever a borrower wants to raise capital, a second charge mortgage must be considered alongside traditional remortgage options.
Compared to remortgaging, second charge mortgages offer compelling advantages. Remortgaging is a sensible route if the buy-to-let borrower is nearing the end of a fixed-rate term. However, this is often not the case, resulting in the payment of early repayment charges (ERCs) on the original loan. As these ERCs are calculated as a percentage of the outstanding loan being paid off they can amount to significant sums, which unsurprisingly borrowers are often unwilling to pay.
Additionally, remortgaging requires sacrificing the borrower's existing interest rate, which can be costly considering the noticeable increase in rates since the ‘mini Budget’ fiasco last autumn. Consequently, the new rate available to the borrower is likely to be higher, resulting in larger repayments. Moreover, if raising capital causes the borrower to enter a higher loan-to-value (LTV) band, there may be an additional increase in the interest rate.
The cost of remortgaging to raise funds can be substantial. In contrast, a second charge mortgage offers an alternative by using the equity within the security, which has likely increased significantly due to the not-insignificant growth in house prices in recent years.
Second charges offer greater flexibility than some may realise and can be a suitable solution across various securities. For instance, in certain cases, a second charge buy-to-let loan or a second charge bridge may be the ideal tool for investors.
Investor opportunities
Consider a scenario where a landlord wants to raise capital against their portfolio but faces challenges preventing them from doing so through a traditional mortgage. They might be on excellent rates they don't want to give up, especially given the increase in interest rates since obtaining the initial loan. Alternatively, the early repayment charges may be prohibitively punitive, making it sensible to avoid paying them if possible.
In such instances, a second charge buy-to-let loan could serve as an alternative solution to raise the required funds without the need for remortgaging. Similarly, a second charge bridge might be appropriate when an existing property lacks an adequate Energy Performance Certificate (EPC) rating and requires remedial work before being refinanced.
Furthermore, second charge buy-to-let and second charge bridging loans offer additional benefits. Notably, they can be obtained quickly, as lenders now commonly utilise Automated Valuation Models (AVMs) to assess the security's value instead of conducting full internal inspections. Some lenders also provide in-house and free legal services, expediting the application process and enabling funds to be released within days rather than weeks or months.
Business owner options
Another option to consider is the homeowner business loan (HOBL), which is suited to property professionals looking to expand their portfolios. HOBLs are ideal when the borrower’s portfolio might not have the required equity or they are faced with the challenge of the first mortgagee not consenting. They allow business owners to use the equity within their main residence for business purposes enabling them to leave the portfolio as it is, protecting preferential rates or incurring costly ERC whilst achieving their expansion/upgrade objective.
HOBLs are equally suitable for first-time landlords seeking to purchase their initial investment property when speed is crucial or when the property requires significant improvement that would make it ineligible for a regular buy-to-let mortgage.
The reality is that second charge mortgages are far more versatile than initially believed and can provide solutions for various borrower types across different assets. While they are commonly associated with supporting borrowers in home improvements or debt consolidation, they have the potential to fulfil a much broader range of borrower ambitions, including portfolio expansion.
Brokers will tell you that investors rarely ask for a second charge mortgage; rather, they seek ways to raise capital. Unfortunately, some brokers will not think about second charges as a way to further investor clients’ plans; if that’s the case, then it may be time to seek alternative advice. Experts in the specialist market adopt a holistic approach to solutions and remain open to products that may have been overlooked in the past. Property investors who partner which such specialists will find out how second charges can help them fulfil their ambitions.
Maeve Ward is director of commercial operations, Central Trust and Mercantile Trust
To recap, this article has helped you...
- Identify scenarios where second charge loans can be used
- Understand the difference in benefits between second charge loans and remortgaging
- Explain who homeowner business loans are for and why they might opt for one
