Is There Second Charge Mortgage Regulation?

30/08/2023

When it comes to regulation, most second charge mortgages are regulated by the Financial Conduct Authority (FCA).

While second charge mortgages have been around since the 1970s, they only became regulated by the FCA in March 2016.

Before the 2008 financial crisis, the second mortgage market experienced rapid growth and innovation. Lenders introduced various products, including sub-prime and self-certified mortgages, which led to a rise in delinquencies and defaults. However, the regulation remained relatively lax during this period, which contributed to the subsequent housing market collapse.

The introduction of second charge mortgage regulation has brought better transparency and consumer protection to the industry.

Borrowers are now better informed about the risks and costs associated with second mortgages, making it easier to make informed decisions.

Are Second Charge Mortgages Regulated?

The FCA regulates most second charge mortgages or second mortgages.

However, there are several second mortgages that are not regulated. Second mortgages secured against buy-to-let properties generally fall outside FCA regulation, as do mortgages for business purposes.

Some buy-to-let second mortgages fall within FCA regulation, referred to as Consumer buy-to-let (CBTL) mortgages. They are regulated mortgages specifically designed for individuals who have become accidental landlords, for example, someone who lets their property for a short period or inherits a property.

Second Charge Mortgage Advice

Most lenders in the second mortgage market only accept loan applications from qualified mortgage brokers. These brokers must be authorised and regulated by the FCA. This is to ensure that any potential borrower has received professional advice.

A mortgage advisor will conduct a detailed Fact Find to establish exactly what the right product is for a client. This process has two parts. Firstly, the advisor gathers all the important information like client names, dates of birth, property value, etc. They then determine the client's short, medium and long-term goals. This will enable the broker to make a recommendation to their client.

The broker will send their client a European Standard Information Sheet (ESIS), which covers the key features of the proposed mortgage contract. Some of the key features include:

The loan amount being borrowed
The interest rate - if it’s a fixed rate loan, then the ESIS will show for how long the rate is fixed and the rate it will revert to once the fixed period has ended.
The loan term - how many months the money is to be borrowed over.
Any early repayment charges (ERC's).
Details of who the client can complain to if required.

If the client is happy with the recommended product, the broker will complete the required paperwork and send the documentation to the lender. The lender will review the application to ensure it meets their requirements. If it does, they will process it and release the money to the client.

Who Can Give Second Charge Mortgage Advice?

To advise on first or second charge mortgages, a broker has to have a minimum of a Certificate in Mortgage Advice and Practice (CeMAP) qualification. Were they to advise on equity release, then they should hold the Certificate in Regulated Equity Release (CeRER).

Advisers generally fall into two categories:

Advisers that the Financial Conduct Authority Directly authorises. This allows the firm to run its business however they want to.
An Appointed Representative (AR). An AR is a firm that acts as an agent for another firm that the FCA Directly authorises.

Search the FCA register to see that any adviser you are talking to has the necessary regulatory permissions to give you the required advice.

The role of a professional mortgage adviser is to be transparent, and one aspect is for them to make clear any fees they may charge.

With some second charge brokers, you may be expected to pay a fee that may or may not include a valuation of your property. Again, all fees should be clearly disclosed to you at the start of the process.

On 31st July 2023, the FCA launched its Consumer Duty rules to raise standards on how firms treat their customers and ensure they receive "fair value". The rules include:

Consumer understanding - consumers should receive clear and understandable information so that they can make an informed decision.
Products should be sold at a price that reflects their value.
Products and services should meet consumers' needs.
Customer Support should be easy to access. In addition, it should be as easy to change or cancel any product as buying it in the first instance.

Second Charge Mortgages On Buy To Let Properties

A second charge mortgage on a buy-to-let property allows landlords to borrow additional funds using their rental property, even if there is an existing mortgage on the property.

Most second mortgage buy-to-let applications fall outside FCA regulation.

It is a way for property investors to access capital without disrupting their main mortgage. The primary mortgage, which is used to purchase the buy-to-let property, remains in the first position, while the second charge mortgage is secondary in priority.

Many investors take out second mortgage buy-to-let loans to enable them to carry out home improvements to their current portfolio, resulting in them being able to increase the rent they charge and get higher quality tenants.

Some lenders are prepared to lend on buy-to-let properties. These loans fall outside of FCA regulations. The maximum loan-to-value (LTV) is generally 75% or sometimes slightly higher.

Mortgage rates on second charge BTL loans depend on several factors, including your credit score or credit rating. They generally attract a higher interest rate than a secured loan on a residential property.

One of the factors that could reduce the interest rate if secured against your primary residence is the equity in your home. If you are borrowing a small amount against the value of your property, then you are likely to achieve a lower borrowing rate.

In terms of affordability, the lender uses a calculation to ensure that the rental income covers the primary mortgage monthly repayment together with the proposed second mortgage monthly repayment.

The rental coverage assessment normally works to a percentage coverage. Typically, for a base rate taxpayer, the monthly rental income must cover the first and second mortgage repayments by 125%. For example, if someone had a mortgage repayment of £750 and the proposed second mortgage repayment was £250 per month, the rental income would need to be a minimum of £1250 per month. (£750 + £250 = £1000 x 125% = £1250).

Can You Get A Second Charge On A Mortgaged Property?

Yes, you can get a second charge on mortgaged property. In fact, it is a requirement that the property you are offering as security for a second charge already has a mortgage secured against it.

It doesn't matter if the existing mortgage only has five years to run; you can still take out a second charge over 20 years. It will mean that in five years, the second charge lender will hold a first charge once the existing first mortgage is paid off.

Some borrowers think it's a good idea to take out second charge loans to pay off any unsecured loan or personal loan they might have. This allows people to take control of their finances and is called a debt consolidation loan.

These types of loans, which are typically secured against the primary residence of a borrower, are covered by FCA regulation.

It's essential that you get the right advice when considering a debt consolidation loan. One of the benefits of a consolidation loan is that it reduces your monthly outgoings to a lower, more manageable amount. However, to achieve this, it usually means that the new secured loan is taken out over a longer period - say 20 years. The downside is that if someone were to keep the loan for the full 20 years, it's likely that they would have to repay much more in interest than if they had kept on paying their loans and credit cards without consolidating.

One way to reduce the interest repayable on a second mortgage loan is for a borrower to make additional capital repayments whenever they can, which has the positive effect of less interest being paid and the loan being repaid in a shorter period. This facility is ideal for someone earning regular commission or receiving bonuses.

Does Regulation State The Purpose Of The Loan?

As long as the loan monies are being used for legal purposes, most lenders are relaxed about how borrowers use their loan proceeds.

Most people take out a second mortgage to consolidate their existing finances or carry out home improvements, or a combination of the two.

When people opt to consolidate their finances, lenders generally send the funds directly to their credit card and loan companies to ensure that the debts are fully paid off. This avoids the temptation for borrowers to bank the new funds and purchase a car or go on holiday rather than using the funds for their intended use.

Get in touch with our expert team to find out more about second mortgages and second mortgage charges.