Second cost mortgage warning with interest rates of up to 35
Struggling borrowers are urged not to sign up for alternative mortgage products without checking all the details – or risk losing their homes.
The financial ombudsman service (FOS) has reported an increase in complaints about second rate mortgages.
This is the type of loan you get along with your standard property mortgage.
It usually has a higher interest rate than a typical mortgage – although it can be as low as 3.5% – but FOS said it has seen cases of second mortgages with interest rates as high as 35%.
This compares with an average interest rate of 3.89% for a five-year standard mortgage, according to moneyfacts.
The main reasons why you should take out another mortgage are if you want to borrow more but your current mortgage provider won't give you more credit, or if you have other unsecured debts that you want to consolidate.
But there are concerns that some struggling homeowners owe debt they can't afford – and borrowers risk losing their homes as a result.
FOS warned that most borrowers would only choose a second mortgage if they were desperate and had difficulty paying other debts.
"But concerns arise about the original advice or decision to lend if the loan becomes unsustainable in the long term," she said.
"Consolidated debt was often unsecured, but now it's secured by real estate – which poses a real risk of the borrower losing their home."
Trade body the finance & leasing association (FLA) said it had seen a 43% increase in second mortgage business in the year to may 2022 (although still below pre-covid pandemic levels).
Per year, 30.302 loans approved with a total value of 1.3 billion pounds.
At the same time, FOS received nearly 700 new complaints about these products last year.
About 31% of complaints were upheld by the ombudsman, which means it was a judgment in favor of the consumer.
Some of these relate to affordability and financial difficulties, which raises concerns among some experts about a potential mis-sell.
"We've seen more examples of vulnerability, debt and late payment from consumers for a product they couldn't afford, with some loans having an interest rate of 35%," FOS said.
"Someone being charged 35% has either been robbed or has a really bad credit history – that's a maximum interest rate," said ray bolger of mortgage broker john charcol.
"People need to have a sensible opinion and seek advice from an independent broker before taking on a second mortgage.
"Repossession of your home is a risk you should keep an eye on."
The couple steve and laura (whose names have been changed) took a mortgage of 10.£000 on to fund some unsecured debts, mortgage arrears and home repairs.
The interest rate on them was 35.
They quickly sought to make the loan payments, believing from the outset that this was unsustainable and that the lender had not implemented proper controls.
For example, the lender has not evaluated his property or checked his expenses.
Steve said he felt the lender should have noticed the poor credit of her current and delinquent debts, and that his bank statements had gambling payments on them.
The department of financial services agreed that not enough checks were carried out before the loan was approved.
He said, "through our investigation, we have learned that steve and laura over 26.000 pounds of unsecured credit had, and the new credit somehow added to it with a higher interest rate and fees.
"They soon fell into arrears, which we believe would have been expected if sufficient checks had been in place."
The lender was told to cancel all interest and fees previously accrued on the loan and not to charge interest in the future. He was also asked to remove all negative credit information from steve and laura's credit profile.
FOS said, "we have been able to help in many cases where loans worth tens of thousands of pounds have been written off, or where the lender has introduced a bespoke tolerance, which has had a positive impact on consumers."
According to FOS, those who take out a second mortgage tend to be more financially vulnerable than others.
"Second mortgage loans are behind the first mortgage and are often taken out to consolidate other debt," she said.
"They come at much higher interest rates than what is available from the mortgage company – we've seen some interest rates over 35."
This means that loans cannot help people get out of debt, but can have the opposite effect, making it harder for people to do so as they accumulate exorbitant interest charges.
Second mortgage loans are regulated by the financial conduct authority, so lenders should check affordability before giving you a loan.
However, their lending criteria may not be as strict as a standard mortgage as it is a different type of product.
Bolger of john charcol said: "ask the lender how many of its complaints go to the ombudsman – it should be able to tell you that.
"And if it's more than 50%, that indicates to me that the company is not treating customers very fairly."
"As always, customers interested in making payments should speak to the lender as soon as possible to find a solution," said fiona howell, director at FLA.
What to do if you have debts
If you're considering getting a second mortgage, experts say it's best to first explore more mainstream options.
David hollingworth of london & country mortgage broker said an alternative is to talk to your existing mortgage provider about borrowing more: "if you're not tied to a mortgage deal, you can shop around and borrow more so you can have everything at the same rate as the lender."
"If you're still in the bargain phase, you can always go to your current lender and see what additional options they have – usually still cheaper than a second charge mortgage."
If you think you have taken an unsustainable loan wrong, the first step is to talk to the lender.
Explain the problem and how you would like the company to set the record straight. Companies must provide you with a final response within a maximum of eight weeks.
If you are still not satisfied, you can contact the ombudsman for assistance.
You must call within six months of receiving a final response to your complaint.
The ombudsman will need some basic information such as your name and address, an explanation of the problem and how you want it fixed, and any details such as the policy number or account number the complaint refers to.