The Financial Conduct Authority (FCA), the financial regulator, plans to bring second charge lending under its mortgage rules from March 2016.
Bringing second charge mortgages under the regulator’s jurisdiction is long overdue. It is astonishing that they did not have the same level of regulation as first-charge or main mortgages, given that the charge is normally secured against a borrower’s home. With the mortgage market review ensuring that all borrowing is affordable both now and when interest rates rise, it simply doesn’t make sense that second charge loans have been excluded from similar scrutiny.
It could become much tougher to get a second-charge loan in future. As is already the case with main mortgages or first-charge loans, borrower affordability will be scrutinised to ensure that the applicant can afford both loans on their property. The same stress tests will also be applied to second charge loans to ensure that loans are affordable in the event of a rate rise. Anyone looking for a second charge loan as a last resort because they are short of cash are likely to be turned down.
It will also be essential that borrowers receive advice to ensure that a second charge loan is the right thing for their circumstances. This should mean people make more of an educated decision when choosing such a loan than they might have done in the past.
This will regulate an area of the market that can be vulnerable to sharp practices and protect those who may be desperate because they need to take on extra borrowing in the first instance.