Second charge lending is where borrowers seek a second mortgage lent at a higher rate of interest in return for a subservient subsequent charge. It is typically, but not exclusively, taken by secondary bridging and peer-to-peer lenders willing to take on a higher level of risk.
However, against the backdrop of cost-of-living increases, rising interest rates, energy costs and an increasing number of bankruptcies and insolvencies, it is important for lenders to be aware of the heightened risks associated with second charge lending.
In light of the increasing number of Fixed Charge (LPA) Receivership appointments we are receiving from lenders, Partner and Registered Property Receiver, Russell Miller, explains some of the pitfalls in second charge security.
These can be severalfold – from the risk associated with decreased property values and the effect this can have on sale value, to the ability of a second charge lender to predict and recover costs and professional fees.
When an investor defaults on their repayments – usually after the accrual of at least two months’ mortgage payment arrears – an LPA Receiver can be appointed.
LPA Receivers are appointed to act independently but with the primary goal to recover the debt held by the lender.
We have a duty known as the ‘equity of redemption’ which, in effect, recognises that there is an overriding duty of care to any party that has a stake in the realisation of the charged asset.
An LPA Receiver’s powers are derived from the Law of Property Act 1925 – hence the term ‘LPA’. But they are often extend by the powers set out in a mortgage deed, and can include collection of rents, securing possession of the property, granting leases and ultimately selling the property in question.
Second charge uncertainty
Whilst a second charge lender can appoint a Receiver to help recover the debt owed to them when an investor defaults on their payments or mortgage conditions, what they are able to recover can be uncertain.
This is because the second charge mortgage is subservient to the first, which means that the first charge mortgage lender has ‘first dibs’ on any proceeds from the sale of the property sale, up to the amount of their loan redemption figure.