Second Mortgages
A second mortgage is one that is created when the borrower offers the property for a second time as security while the first lender still has a mortgage secured on the property. The new lender takes a second charge on the property, the original lender retains the deeds and his charge take precedence over subsequent charges. This means that, in the even of a sale de to default, the original lenders claim will first be met in full (if possible) and if sufficient surplus then remains, the second mortgagee’s charge comes into play.
Lenders will, of course, only offer a second mortgage if there is sufficient equity in the property, and, since second mortgages represent a higher risk to lenders, they are likely to be offered at higher rates of interest than first mortgage.
Unsecured Loans
In contrast to secured loans, and unsecured loan relies on the personal promise, or covenant, of the borrower to repay. Unsecured loans are therefore generally higher risk than secured lending, with the consequence that they are subject to higher rates of interest and are normally available only for much shorter terms. For example, whereas mortgages, or loans secured on a property are available for up to 40 years, personal loans are rarely offered much more that six or seven years.
Unsecured loans have long been available from banks and finance houses, but it was not until the passing of the building societies act 1986 that building societies were able to move into that area of business. Initially they were restricted to no more than 5% of their commercial assets being in the form of unsecured loans, although this has since been increased to 15%.
Unsecured personal lending takes a number of forms, the most common of which are described below.
Personal Loans
These are offered by banks, building societies and by some finance houses. They are normally for a short term of one to five years, and the interest rate is generally fixed at the outset and remains unchanged throughout the term. Many of the larger lenders operate a centralised assessment of loan applications through telephone call-centres, using a form of credit scoring to assess the suitability of the borrower.
The loan can be used for any purpose y the customer, typically they are used to purchase cars, fund holidays, or consolidate existing higher cost borrowings such as credit card balances.
The purpose of the loan determines whether it is regulated under the terms of the consumer credit act 1974. Most such loans of £25,000 or less are regulated by the act unless they are for house purchase or home improvement.
Overdrafts
An overdraft is a current account facility, offered by all retail banks and some building societies, which enables the customer to continue to use the account in the normal way even though its funds have been exhausted. The bank sets a limit to the amount by which the account can be overdrawn. An overdraft is a convenient form of short-term temporary borrowing, with interest calculated on a daily basis, and its purpose is to assist the customer over a period in which expenditure exceeds income – for instance, to pay for a holiday or to fund the purchase of christmas gifts.
Because it is essentially a short-term facility, the agreement is usually a fixed period, after which it must be renegotiated or the funds repaid. Overdrafts that have been agreed in advanced with the institution are normally an inexpensive for of borrowing, although there may be an arrangement fee. Unauthorised overdrafts, on the other hand, attract a much higher rate of interest.
Revolving Credit
This refers to arrangements where the customer can continue to borrow further amounts while still repaying existing debt. There is usually a maximum limit on the amount that can be outstanding, and also a minimum amount to be repaid on a regular basis.
The most common way of providing revolving credit is through credit cards, although some institutions do provide revolving personal loans that allow the borrower to draw down funds as the original debt is repaid.
It is hard to believe that plastic cards, now an integral part of most people’s financial affairs, have been around for the last 30 years. Their development and their impact have gone hand-in-hand with the rapid advance of the electronic processing technologies on which their systems now largely depend. Many cards can now hold a wealth of information about cardholders and their accounts, and can therefore interact directly with retailers and banks electronic equipment, these cards are often referred to as smart cards.
Credit Cards
Credit cards enable customers to shop without cash or cheques in any establishment that is a member of the credit card companies scheme.
Originally all credit card transactions were dealt with manually at the point of sale, but most retailers now have terminals linked directly to the credit card companies computers, enabling on-line credit limit checking and authorisation of transactions.
As well as providing cash-free purchasing convenience, credit cards are a source of revolving credit. The customer has a credit limit and can use the car for purchases or other transactions up to that amount, provided that at least a specified minimum amount (usually 3% of the outstanding balance) is repaid each month. The customer receives a monthly statement, detailing recent transactions and showing the outstanding balance. If the balance is repaid in full within a certain period (usually 25 days or so), no interest is charges, if a smaller amount is paid, the remainder is carried forward and interest charges at the companies current rate.
Credit cards are an expensive way to borrow, with rates of interest considerably higher than most other lending products. There is also normally a charge if the card is used to obtain cash either over the counter or from an automated teller machine (ATM), or if the card is used overseas.
Credit card companies charge a fee to the retailers for their service. This is usually as a percentage (typically around 3%) of the value of transactions when the credit card company makes a settlement to the retailer. There are, however, a number of advantages to retailers, in addition to the fact that more customers may be attracted if payment by credit card is available. For instance, payment is guaranteed if the card has been accepted in accordance with the credit card companies rules. Furthermore, the retailer can reduce his or her own bank charges because the credit card vouchers paid into the bank account are treated as cash.
Two other types of cards are mentioned below for completeness, although they do not offer credit facilities (except in a very limited sense in the case of charge cards).
Charge Cards
Although used by the customer in the same way as a credit card to make purchases, the outstanding balance on a charge card must be paid in full each month. The best known examples are american express and diners club.
Debit Cards
An innovation introduced in the late 1980’s, debit cards enable cardholders to make payments for goods by presenting the card and signing a voucher, in just the same way as with credit cards or charge cards. In the case of debit cards, however, the effect of the transaction is that funds equal to the amount spent are transferred electronically from the cardholder’s current account to the account of the retailer. Debit cards can also be used to withdraw money from ATM’s, and many debit cards now also act as a cheque guarantee card.
When looking for a mortgage, bridging loan, or a secured loan, Advanced Finance are one of the largest brokers in the UK who are abel to arrange finance for their clients, no matter what their situation.