All too often, the expense of a house purchase doesn’t finish with the transaction itself, with many buyers opting to carry out expensive home improvements and renovations once they have the keys. However, there is the danger that advisers may be missing out on highlighting the benefits of opting for a day-one second charge mortgage, with the borrower instead looking to borrow the sums needed through more costly unsecured credit.
A day-one second charge mortgage
It’s not uncommon for buyers to move into a new property knowing full well they will need to spend a substantial sum getting the property into shape. This might mean fitting a new bathroom or kitchen, for example.
These buyers often turn to unsecured credit, like a personal loan or credit cards, in order to provide the required funding. However, there’s no escaping the fact this can be seriously costly, with painfully high monthly repayments.
There is a much more affordable option in the form of a second charge mortgage though.
It’s not always well known amongst advisers that a second charge mortgage can actually be taken out on day one of owning a property, essentially as soon as the client takes ownership of the property. Depending on the lender, the client may not even have to wait for the Land Registry to update, either.
It means that rather than relying on expensive unsecured credit, the client can get the funds they need immediately on a far more affordable basis, with more flexibility over precisely when it is paid off.
Repaying a stamp duty loan
It’s not just about home improvements though. There may also be occasions when a day-one second charge mortgage is needed to pay off an existing debt to a loved one. For example, it’s not unusual for someone buying in a big city to face a significant stamp duty bill, particularly given the rate at which house prices have risen over the last couple of years.
They may be in an excellent, high-paying job which means they are in a position to borrow the money needed for the purchase and have enough set aside to cover a deposit, but the stamp duty too may be a big ask.
If they have borrowed that cash from a friend or relative, then a day-one second charge mortgage allows them to immediately tap into the value of their property and repay that money, ensuring it does not become a source of awkwardness within that relationship.
Paying off the second charge promptly
It’s also worth highlighting the way that seconds are typically paid off. The loan is taken out over a lengthy term – perhaps 20-25 years – and that can initially put some advisers off them as an option. But, in reality, we tend to see seconds paid off between two and five years after they are taken out.
It all comes down to that house price growth once again. Many borrowers these days opt for a five-year fixed rate when they first purchase a property and find that five years down the line their property has grown in value by more than the initial second charge. As a result, when they remortgage they do so for a higher sum and pay off the second charge.
Obviously, you can never take house price growth for granted. But given the fact many borrowers opting to take out a second charge do so in order to carry out home improvements, this increases the chances of the property gaining in value over a short time period. Add in the fact that there remains a significant housing shortage, with stock levels at estate agents incredibly low, and it’s reasonable to expect to see growth continue.
Working with specialists
Second charge mortgages have become far more prevalent in the mortgage market in recent years. In fact, the latest data from the Finance & Leasing Association shows that in the 12 months to January 2022, the number and value of new second charge deals jumped by 57% and 62% respectively.
In some cases, this is down to mortgage advisers themselves becoming more comfortable with the products, but equally there have been plenty who have recognised the value of partnering with experts in the field. After all, this is a specialist area of the property finance market, and boasting the experience and contacts can make all the difference when it comes to getting cases over the line.
Ultimately, it’s up to individual lenders to work out the best option for them, but what’s clear is advisers need to have a plan in place for helping clients for whom a second charge loan is appropriate.