Self-employed individuals looking for additional funds for a special project or unexpected expense now have more lending options. Pepper Money, a specialist lender in the U.K., has relaxed its criteria for second-charge mortgages, making them more accessible to the self-employed. What are the risks?
What is a Second Charge Mortgage?
A second charge mortgage is a loan secured against a borrower’s property, where a first mortgage already exists. This means that if the borrower fails to repay the second charge, the lender can repossess the property to recoup their funds, but only after the first mortgage lender has been paid in full.
Benefits and Risks
Second-charge mortgages can be a good option for self-employed borrowers who may find it difficult to obtain traditional remortgages due to fluctuations in their income. They can borrow additional funds without having to refinance their entire primary mortgage. These loans are often used for home improvements, debt consolidation, or unexpected expenses.
Ryan McGrath, Second Charge Sales Director at Pepper Money, highlights the benefits: “These improvements will help to level the playing field for the self-employed,” he told mortgage news site Mortgage Solutions.
He continued, “When it comes to second charge mortgages, we have recognised some of the challenges faced by self-employed customers and improved our criteria to address those challenges head on.”
However, there are also risks involved. Interest rates on second-charge mortgages are typically higher than those on first mortgages and because the loan is secured against the property, there’s a risk of repossession if repayments are missed, which is the same with any mortgage.
Pepper Money’s Changes
Previously, self-employed borrowers at Pepper Money faced stricter criteria compared to employed applicants. Here’s what’s changed according to the Mortgage Solutions report:
Equal Rates: Self-employed borrowers can now access the same competitive interest rates as employed borrowers for loans up to 95% of the property’s value (loan-to-value ratio, LTV).
Simplified Income Verification: For affordability assessments, Pepper Money will now consider just the latest year’s income for all their second-charge mortgage deals. In some cases, they might still request two years’ proof of income.
These changes are significant, as they can potentially save self-employed borrowers money and make the application process faster and less bureaucratic.
While Pepper Money’s relaxed criteria open doors for self-employed individuals seeking additional funds through second-charge mortgages, it’s crucial to carefully consider the risks involved and ensure you can afford the repayments before taking out this type of loan.
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