Posted on 5 August 2014 by
So firstly, what is a second legal charge (or secured loan)? Very simply it’s when a new lender comes in and provides you with a loan that is secured on your house, on top of your existing mortgage. You now have two finance companies with legal charges on your home; however the main mortgage will always take precedence. So if the house is repossessed, the lender who is providing the first legal charge will have the first access to the monies available from the forced sale; the provider of the secured loan can then take what they require from the residual funds.
Before the recession if a client was turned down for borrowing from standard or sub prime lenders, which in those days was relatively unusual, they might turn to a secured loan as a last resort. The reason why they were a last resort was that the rates and fees used to be very high. However, this has changed considerably and we now have access to a whole range of often highly competitive products to meet most requirements.
Secured loans do have a higher interest rate than most residential and buy to let mortgages, and this reflects the fact that they pose a greater risk to a lender – and clearly because of the higher rate and fees they are not suited to everyone, however on occasion they can be very useful.
My clients take secured loans for a whole range of reasons, but the most common are outlined below;
1. If you are lucky enough to have an excellent lifetime tracker, on an interest only basis, taken out when the base rate was much higher (so, BoE base rate plus 0.99%, for example) you would be paying almost no interest on your borrowing. Clearly you do not want to lose this fantastic mortgage, but you need an extra £50,000 for some home improvements. You approach your current lender to ask for a further loan. Of course you can borrow the extra cash is the answer, but we need to put the whole mortgage onto repayment and on a new, higher rate. Not particularly attractive. So instead of losing your fantastic deal you can borrow the extra monies via a second legal charge, and protect your low interest rate.
2. You might be locked into a fixed term mortgage with a hefty early repayment charge, and you find yourself needing to borrow further money for a project. You approach your current lender and they refuse, so you look at remortgaging elsewhere. You find a new bank which is happy to take you on, but now you find yourself having to pay a large penalty for leaving your present mortgage deal – this is just dead money. So instead of leaving you opt for a second legal charge, thus saving the early repayment charge. In this example, I would run a cost comparison to see whether it is cheaper to look at a new remortgage or a secured loan.
3. Sometimes you need to move very fast and have funds available quickly. Speed, unfortunately is not something the current mortgage market is very good at. However a second legal charge can often be dealt with far quicker.
Although they are expensive, a second legal charge can often be a very useful way of thinking outside the box for a client’s situation – so if you recognise any of the above then please contact myself or one of my expert colleagues to discuss how we can help you out. It is very important to get professional advice if you are considering this route, as you need to make sure this is the most suitable option for your circumstances.
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