Commercial finance is often complex. Indeed, it can often take multiple properties and multiple lenders in order to arrive at a satisfactory solution. Of course, the nature of some business restructuring can also add time pressures.
We saw a recent example where, due to pressure from the bank, the solution resulted in a £2 million high street remortgage on one property and a short term bridging solution involving a number of buy to let properties.
Having our foot in the commercial, bridging and second charge camp (to name a few) we see the benefit of second charges as a facilitating product to make the rest of the deal work. Sometimes a straightforward second charge can provide the solution to a deal that otherwise won’t fit.
As such seconds are an area commercial brokers would do well to take a longer look at. Indeed, even if you don’t have regulated mortgage permissions, you can still provide your clients a regulated second charge option on an introducer only basis.
On the whole borrowers tend to have greater available equity in their residential home hence there is more opportunity to capital raise with regulated seconds. However at last count there were 14 lenders offering second charge products on buy to let properties and there are even lenders offering non status business loans on a second or third charge basis.
We often see clients raising capital via a second charge loan secured on a residential or buy to let property for deposits on a new buy to let, business expansion, to settle tax bills or to repay other business debt.
Often a commercial remortgage doesn’t make sense due to the costs involved or because of background factors such as adverse credit being an issue. Second charges can come to the rescue with rates from under 4% for prime cases through to plans accepting unlimited CCJ’s and defaults. There are even loans available to clear debt management plans and bankruptcies which can act as a credit repair vehicle prior to a larger restructure in the future.
Commonly we see second charges used to make up the shortfall when the primary restructure can’t raise the full amount required – without the extra cash raised by the second charge the overall deal would simply fail.
When bridging, a second charge bridge may work out far cheaper than taking out the existing first charge. Also if affordability isn’t an issue consider a second charge term loan instead – you will get far higher LTV’s, lower rates and some lenders don’t charge early repayment charges (ERC)’s on non regulated loans. A term loan also takes the pressure off your client to refinance. If their initial plan falls through they won’t find themselves facing soaring costs as would be the case with a bridging loan if kept for longer than originally planned.
If brokers don’t have permissions to advise and arrange regulated second charges, based on their non regulated fact find there is nothing to stop them talking through some scenarios with a second charge master broker prior to making an introduction.
There are of course FCA rules to abide by in these circumstances. Make sure the master broker has permissions to give advice on regulated second charges and procedures in place to deal with unauthorised introducers. You can check the status of the master broker by visiting the FCA register.
Transparency is key. Be sure to inform the borrower before the introduction of any commission your will receive as a result. The FCA has made it clear that unregulated introducers must not receive any money in connection with any transaction the client enters with the authorised party however this doesn’t including payment legitimately owed to you as a result of the introduction – i.e. your commission.
You’ll also need to make the client aware of any professional ties you may have to the master broker for example if you are part of the same parent company or group so as to avoid any conflict of interest. And as an unregulated introducer you must not engage in “advertising or in the presentation, offering, preparatory work or conclusion of the regulated mortgage contract”.
For some being forced to step away from the regulated sale process may be difficult. But if you understand the FCA’s rules on the matter and get comfortable with them this could open up better outcomes for your business clients and an additional income stream for your business.
2 out of 3 borrowers get a lower rate than our representative example of a regulated secured loan below:
Mortgages and Remortgages
£80,000 over 240 months at an APRC OF 4.3% and a discounted variable annual interest rate for two years of 2.12% at £408.99 per month followed by 36 payments of £475.59 and 180 payments of £509.44. The total charge for credit is £39,873 which includes a £995 broker / processing fee and £125 application fee. Total repayable £119,873.
Secured / Second Charge Loans
£63,000 over 228 months at an APRC OF 6.1% and an annual interest rate of 5.39% (Fixed for five years – variable thereafter) would be £463.09 per month, total charge for credit is £42,584.52 which includes a £2,690 broker / processing fee. Total repayable £105,584.52.
£4,000 over 36 months at an APR OF 49.9% (fixed) and an annual interest rate of 49.9% would be £216.21, total charge for credit is £3,783.56. Total repayable £7,783.56.
THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME
REPAYING YOUR DEBTS OVER A LONGER PERIOD CAN REDUCE YOUR PAYMENTS BUT COULD INCREASE THE TOTAL INTEREST YOU PAY. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY OTHER DEBT SECURED ON IT.
If you have been introduced to Promise Money by a third party / affiliate, Promise may pay them a share of any fees or commission it earns. Written terms available on request. Loans are subject to affordability status and available to UK residents aged 18 or over. Promise Money is a trading style of Promise Solutions Ltd. Promise Solutions is a broker offering products which represent the whole of the specialist second mortgage market and is authorised and regulated by the Financial Conduct Authority – Number 681423.
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