STRUGGLING borrowers are being urged not to sign up to alternative mortgage products without checking all the details – or risk losing their home.

The Financial Ombudsman Service (FOS) has reported an increase in complaints about second charge mortgages. 

This is a type of loan you secure against your property, alongside your standard mortgage. 

It usually has a higher interest rate than a typical mortgage – although they can be as little as 3.5% – but the FOS said it had seen instances of second charge mortgages with rates of up to 35%.

That compares with an average rate of 3.89% on a standard five-year fixed mortgage, according to Moneyfacts.  

The main reasons you would take out a second charge mortgage are if you want to borrow more but your existing mortgage provider won’t lend you any extra, or if you have other unsecured debt that you want to consolidate.

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But there are concerns that some struggling homeowners are taking on debt they can’t afford – and borrowers risk losing their home as a result. 

The FOS warned that most borrowers will only opt for a second charge mortgage if they are desperate and struggling to repay other debts. 

It said: “But concerns arise about the original advice or lending decision when it’s evident that over the long-term, the loan is not sustainable.

“Often the debts which have been consolidated were unsecured, but they’re now secured on the property – presenting a real risk of the borrower losing their home.”

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Trade body The Finance & Leasing Association (FLA) said it saw a 43% increase in second charge mortgage business in the year to May 2022 (although still lower than levels before the Covid pandemic). 

It said that 30,302 loans were agreed in the year, worth a total of £1.3billion. 

But at the same time, the FOS received almost 700 new complaints about these products last year. 

Some 31% of the complaints were upheld by the Ombudsman, meaning it ruled in favour of the consumer. 

A number of them related to affordability and financial difficulty, raising concerns with some experts about potential mis-selling. 

The FOS said: “We have seen more examples of vulnerability, debt and consumers falling behind on payments for a product they could never have afforded, with some loans carrying a 35% interest rate.” 

Ray Boulger of mortgage broker John Charcol said: “Anyone being charged 35% is either being ripped off or has a very bad credit history – that is an extreme rate of interest.

“People need to take a sensible view and take advice from an independent broker before agreeing to a second charge mortgage.

 “Your house getting repossessed is a risk to bear in mind.”

Unaffordable loans

One couple, Steve and Laura (whose names have been changed), took out a £10,000 second charge mortgage to clear some unsecured debts, mortgage arrears and to fund house repairs.

It had an interest rate of 35%. 

They soon struggled to meet the repayments on the loan, and said they felt it had been unaffordable from the start and that proper checks had not been carried out by the lender. 

The lender had not valued their property or checked their outgoings, for example.

Steve said he felt the lender should have spotted their poor credit score, existing debts and arrears, and that there were gambling payments on his bank statements. 

The FOS agreed that sufficient checks had not been carried out before the loan was approved. 

It said: “Through our investigation, we learned that Steve and Laura had over £26,000 in unsecured loans and the new loan added to that by some way with its high interest rate and fees.

“They quickly fell into arrears, which we thought would have been foreseeable had sufficient checks been carried out.” 

The lender was told to remove all interest and charges that had previously been applied to the loan, and not to apply any interest going forward. It was also asked to remove any negative information about the loan from Steve and Laura’s credit file. 

The FOS said: “We’ve been able to help in several cases, where tens of thousand of pounds’ worth of loans have been written off, or where the lender has provided much more tailored forbearance, which has had a positive impact for consumers.”

Vulnerable customers

According to the FOS, those taking out a second charge mortgage tend to be more financially vulnerable than others. 

It said: “Second charge loans sit behind the first charge mortgage and are often taken out to consolidate other debts.

“They come with much higher interest rates than those available from a high street mortgage lender – we’ve seen some interest rates over 35%.”

This means that, rather than helping people get out of debt, the loans can have the opposite effect of getting people further into difficulty as expensive interest charges rack up.

Second charge mortgages are regulated by the Financial Conduct Authority, so lenders should be carrying out affordability checks before giving you a loan.

But their lending criteria may not be as strict as with a standard mortgage because it’s a different type of product. 

John Charcol's Boulger said: “Ask the lender what proportion of their complaints that go to the Ombudsman are upheld – they should be able to tell you. 

“And if it’s more than 50%, it suggests to me that the company is not treating customers very fairly.” 

Fiona Hoyle, a director at the FLA, said: “As always, customers who are concerned about meeting payments should speak to their lender as soon as possible to find a solution.”

What to do if you're struggling with debt

If you are considering a second charge mortgage, experts say it’s best to explore more mainstream options first. 

David Hollingworth of mortgage broker London & Country said one alternative is to speak to your current mortgage provider about borrowing more: “If you’re not tied into a mortgage deal, you can shop around and increase your borrowing so you have everything on one single rate with the same lender.

“fIf you are still in a deal period, you could still go to the existing lender and see what further advance options they have – typically it will still be cheaper than a second charge mortgage.”  

If you think you’ve been wrongly given an unaffordable loan, the first step is to speak to the lender. 

Explain the problem and how you would like the company to put things right. Firms are required to give you a final response within a maximum of eight weeks.

If you’re still not happy, you can go to the Ombudsman for help.

You’ll need to get in touch within six months of receiving the final response to your complaint.

The Ombudsman will need some basic information such as your name and address, an explanation of the issue and how you want it put right, and any details such as the policy number or account number the complaint relates to. 

It will contact the business for its view on the situation, and then decide on an outcome. 

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If you're worried about paying bills, falling behind or are in debt, there are plenty of organisations where you can seek advice for free, including:

• National Debtline – 0808 808 4000
• Step Change – 0800 138 1111
• Citizens Advice – 0808 800 9060

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