Why arranging a second mortgage may get a lot harder

The Financial Conduct Authority (FCA) has recently announced that it plans to regulate the second charge mortgage market. Up until now a second charge mortgage was treated as consumer credit but in the future it will come under the same rules as first charge mortgages.

What is a second mortgage?

A second mortgage is a loan arranged in addition to the original mortgage that uses equity in the property to secure the finance for the homeowner. This is typical of larger loans used for home improvements or to finance a business.

Why are changes being made to the regulation of a second mortgage?

The FCA have stated that the arrears record for the second mortgage market are higher than for the ordinary house purchase mortgage market. There is a concern that arranging a second mortgage has become too simple and some undesirable selling practices have crept into the market.

Why would someone take out a second mortgage?

home improvement companies, amongst others, can arrange a second mortgage for a customer simply and quickly without reference to their current mortgage lender
home owners who have had a poor credit experience since they took out their existing mortgage may feel that a second mortgage is more likely to be granted
customers who do not want their current mortgage lender to know all their financial information may go down the route of a second mortgage for confidentiality reasons
mortgage lenders may take customers off their current advantageous rate if they applied for extra funds

What will new changes mean for someone applying for a second mortgage?

applications will have go through the same tighter rules as a first-charge mortgage
there will be checks carried out to ensure that the customer will still be able to afford the mortgage payments even if interest rates rise
often a second mortgage will have different conditions, and for a different term, to the original mortgage adding an extra layer of complexity to the applicant's financial affairs, this could put their home at risk if they default.

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Why arranging a second mortgage may get a lot harder