ADVISER: The pitfalls of second charge borrowing

Advising homeowners who Are at risk of losing their home due to arrears on secured loans is a complex area. With this in mind, it’s essential that you’re aware of the very particular problems that can arise when your client has a second charge on their property. 

Advisers and clients alike need to be aware that when a borrower defaults on payment of a secured loan or a second charge the lender may be entitled to:

• call in the whole balance of the loan and
• charge interest, possibly on a compounding basis, on the balance of the loan.

Familiarise yourself with the terms and conditions of each agreement

The key things for an adviser to ask for when a client seeks advice in relation to a secured loan are:

• a copy of the loan agreement
• a full statement of account.

You’ll need to check the terms and conditions of the loan contract carefully as well as analysing the statement of account to work out the interest and charges being levied on a monthly basis.

Why normal mortgage arrears case practice won’t always work

Normally, advisers and borrowers negotiate a repayment proposal plan with the lender to pay the contractual monthly instalment plus a sum off the arrears required to clear the arrears within the term remaining.  They may even enter into a Suspended Possession Order on such terms.

In many cases the interest and charges being levied on the account means that the balance may be increasing in spite of payments being maintained. We’ve seen cases where the monthly interest being levied on the balance is greater than the contractual monthly instalment.

If your client has this type of contract you need to contact the lender to negotiate a reduction in the fees and charges.  You want to ensure that there is a reducing balance and, ideally, that the loan will be redeemed within the term remaining. 

Is a time order an option?

If the lender is unwilling to negotiate and the loan is a regulated agreement under the Consumer Credit Act you may consider making an application for a Time Order. 

The borrower can make such an application once a Default Notice has been issued but they will have to consider other issues,

• whether it is just to make an application and
• how much time it will take to clear the balance if interest and charges are frozen or reduced to a lower level. 

If you have a case where you think a time order may be an option and you would like guidance contact Housing Rights Service

Lender increases monthly instalment

The lender may exercise their right under the terms of the contract, to increase the contractual monthly instalment to ensure that the balance of the loan will redeem within the term of the loan agreement. Depending on the level of the arrears, this may result in a substantial increase in the contractual monthly instalment.

If this happens, it is vital that you check that the lender adhered to the terms of the contract.  The lender is usually required to give at least 7 days notice in writing of such an increase. 

Second charge lending can be a complex issue for both borrowers and advisers so it’s essential that you check the small print on any loan agreement.  You don’t want your client discovering that, despite keeping to a payment plan for years, they still have an outstanding balance secured on their home at the end of the loan period.

Resources to help

If you do a lot of debt work you may want to attend our upcoming Lunchtime Learning seminar which examines the Impact of Negative Equity on Possession Proceedings.

You’ll also find some useful Professional Resources in our shop and comprehensive information for advising clients in housing debt in Chapter 8 of Housing Law in Practice NI