Borrowers ‘unaware’ of mortgage that ‘can meet needs perfectly’ | Personal Finance | Finance
Ranald Mitchell (Image: Newspage)
A mortgage expert has claimed many Brits are unaware of a product that can meet their needs perfectly, because the vast majority of mortgage brokers don’t raise it as an option. Homeowners who need to borrow more money, whether to extend their homes, pay a surprise tax bill or consolidate other debts, often assume they have only three choices: remortgage, ask their current lender for a further advance or take out an unsecured loan.
But Ranald Mitchell, director of Norwich-based mortgage specialists, Charwin Mortgages, said there was another option — the ‘second charge’ mortgage, or secured loan.
Ranald said: “Used correctly, a second charge can be one of the most useful tools in the mortgage market. It can help homeowners raise money without disturbing their existing mortgage rate, avoid early repayment charges, deal with expensive debts, cover tax bills, buy out a former partner, fund home improvements and even support a business.
“The problem is that many people never hear about it because when they need extra money, most brokers do not bring it into the conversation because their scope of services is limited. In many situations, there is a danger the customer may be pushed towards a full remortgage when that is not the best route as it can mean losing a competitive mortgage rate or having to pay an early redemption charge (ERC).”
By way of example, Ranald said to imagine someone with a £300,000 mortgage on a low fixed rate who wants to borrow another £50,000. They could remortgage the full £350,000, but if their existing rate is much lower than current mortgage deals, that may be a costly mistake.
It’s not often raised as an option, the expert said (Image: MTStock Studio via Getty Images)
He said: “A second charge will allow them to leave the £300,000 mortgage with the competitive rate untouched and only pay the new rate on the additional £50,000. But if the only advice given is to remortgage the full balance, the borrower may end up repricing hundreds of thousands of pounds of existing mortgage debt unnecessarily.”
Ranald said that second charge mortgage rates were often higher than standard residential mortgage rates, but stressed that they should not be looked at in isolation.
He added: “The better question is: what is the total cost of all the borrowing? This is known as the blended rate. A second charge might have a higher rate on the new borrowing, but the original mortgage remains on its lower rate. The overall cost can still be lower than remortgaging everything.
“For example, a borrower with a large first mortgage at a low fixed rate may be better off paying a higher rate on the extra borrowing only, rather than moving the whole mortgage balance onto a new, higher rate.”
Ranald said second charges were not for everyone, as turning unsecured debt into a mortgage-style loan can increase the total amount of interest repaid over time. The real danger, he added, was when they were not considered at all and he urged people looking to raise extra money to ensure their adviser is weighing up all the options, not just defaulting to a full remortgage.
Ranald said for some people in some circumstances they could be the perfect fit: “A second charge mortgage arranged properly, with transparent advice, clear comparison against the alternatives, and sensible fees, can be a highly effective borrowing option.
“The problem is not the product. The problem is when the product is not considered alongside the customer’s first charge mortgage options from the start. Used badly, second charges can be expensive. Used properly, they can be brilliant.”
