James Rainbird is managing director of Pink Pig Loans
In this market when we talk about second-charge mortgages, and what they’re used for, we tend to focus on a couple of key areas – namely debt consolidation and/or home improvements.
Now, of course, there’s a very understandable reason for this. It being a very clear fact of second-charge life that most customers are using seconds for one of those two things, or perhaps both.
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However, in doing that, we are perhaps narrowing the focus for second-charge usage and not actually looking at a number of other reasons why a second-charge product might be suitable for a client. And that might be especially pertinent in the type of housing market we have right now.
For instance, ours has been a housing market dominated by purchase activity over the last 12-18 months, and while that may slightly taper off following the end of this month’s stamp duty holiday (although it’s already been and gone in Wales and Scotland) there is still a considerable amount of demand to buy based on a number of factors.
In looking at the purchase sector, we have to accept that buying a home does not come cheap. Just getting to the point of purchase requires a significant deposit in most cases, and on top of this you’re going to need money for stamp duty (or its regional variants), you may need money to renovate and refurbish when you move in, and you might possibly also have to pay off members of your family who might have helped you get to this point but ultimately want paying back.
There are also plenty of other reasons why you would need further cash in the immediate period post-completion, but prior to that the issue of stamp duty or land transaction tax in Wales or land and buildings tax in Scotland is often a major consideration because I think many people are surprised by just how much money it requires.
Plus it’s a non-negotiable and, while we of course welcome ‘holiday’ periods, the chances of the government getting rid of it are non-existent given how much revenue it generates.
In other words, you want the home, you have to somehow find the money to pay for it and the tax that accompanies it.
Now, the simple recommendation might be to try and do all this via a first-charge mortgage but again it’s easier said than done. What if you are hovering around a certain LTV bracket, and borrowing more money on the first-charge is going to see you slip into a pricier product band? That could be costly in itself especially as mortgages tend to be for longer terms.
However, there are options to use seconds here, and they essentially allow the client to raise further finance after completion on the home, which can then be used to fund whatever they need it for.
We tend to call this ‘aspirational borrowing’ and it’s often required by those who might have larger mortgages, are perhaps more high net-worth, and have a greater degree of certainty about their income levels over a longer time period.
But, it can also be used as mentioned, for those paying back family members quickly – perhaps they borrowed the money for the stamp duty payment – and those who want to make changes to the home straight away.
The products we can access to do this at Pink Pig are really flexible, with certain lenders not working on income multiples, loans available up to 100% LTV, and a much quicker ‘transaction’ in that the client gets access to the money in a much shorter period of time.
Without such options, what we tend to see is clients going off and looking for unsecured debt to fund their needs. And, in so many cases, we then see the client further down the line when, for example, their 0% deal has run out and we’re trying to pick up the pieces of how we might refinance this.
Ultimately, a second-charge post-completion can work so much better on so many levels and, again what tends to happen, is that the debt incurred here is reconstituted in two/three/five-year’s time within the remortgage, when the value of the property may well have risen and the concern around slipping into a more expensive LTV is not there at all.
What we should be trying to do with seconds now is show the art of the possible. Of course, the vast majority of cases fit a certain structure and need, but there are so many further opportunities which can work far better for the client than a straight refinance or a further advance.
Clients are savvy enough to recognise this and it’s important advisers don’t have their blinkers on when it comes to seconds otherwise they will miss out on business, and the client will miss out on the right option.