Separation and Second Charge(?) on a New Property

AnnKittenplan

I am involved in a separation and I'm getting wildly conflicting advice about Second Charges. I'm extremely confused and was wondering if anyone could help.

Our situation (I've used round numbers to try to keep it clear but they are not that far from the actual numbers):

We jointly own a house. I have moved out. He has stayed in the house. We are going to sell. We are splitting the £50 000 equity 50/50 ie £25k each.

The confusion seems to be arising in the next step:

He wants to buy a new house for £100k. I have volunteered to loan him half of my 50% ie £12½k so that he will find it easier to get a mortgage. This is not a gift!

It is my understanding that the way to protect my money is to see it as an investment in the new property. The legal mechanism whereby I secure that investment is called a "Charge".

Q1. Am I correct in my understanding of what a "Charge" is?

We have a signed a Separation Agreement which states that I will have a 12½% stake in the new property because of my initial £12½k investment in a £100k purchase.

The events (sometimes known as "Triggers") which release my investment to me are:

1. youngest child reaching 18
2. him co-habiting for a defined period
3. selling the new house
4. further order of the court

These are totally standard and agreed upon by "countless" ex couples according to my conveyancing solicitor.

Now the problem...

My ex is saying that he cannot get a mortgage under those conditions. I briefly spoke to a mortgage adviser on Saturday and she said the same thing.

I got a second opinion today from another mortgage adviser who said although she'd never actually arranged a mortgage in these conditions she couldn't see why it would be a problem.

Q2. Can anyone explain why the mortgage advisers (including the one I spoke to) would say that a mortgage would be impossible with a Second Charge attached? The woman I spoke to on Saturday was fairly emphatic.

I can understand that it might limit your choice of products but to be told that you are totally excluded from the market doesn't make any sense to me. Unless I'm completely misunderstanding what a Second Charge is.

If someone can make sense of it can they explain the circumstances under which a Second Charge would be a viable way of securing an interest on a property.

On the one hand I've got a conveyancing solicitor with 30 years experience saying this is utterly routine, but on the other hand I've got mortgage advisers saying it's totally unprecedented. What's going on?

There's a communication breakdown, or a misunderstanding somewhere, but I just can't see it.

If you've read to the end of this and can help I'd be enormously grateful. There are children involved and we would like this resolved for their sakes.

Dave_Ham

Solicitor is out of touch I am afraid.

No credible lender will lend in these circumstances. You need to find an alternative solution, which could be you going on the mortgage and retaining a share in the property formally and with the mortgage companies approval.

Anything other than this will stop the mortgage, anything without telling them will leave you unprotected..

Sorry its not better news, solicitor should know better..

AnnKittenplan

Thanks Dave.

I spoke to a Barclays Mortgage Adviser on Saturday who said: No way, I spoke to a Halifax mortgage adviser today who said: I can't see why not (but I'd have to ask to be sure about it).

Could you explain what a Second Charge is, and when it would be used in a separation?

We were also told right at the start of the process, four years ago now, by a Mediator that Charges and Triggers were the way to secure financial interests. Has everything changed in that time?

Dave_Ham

To be honest I am not qualified on the legal side, just the mortgage. There are questions on an application like "is anyone providing funds to the deposit that will not be party to the mortgage"

Say you take out a mortgage for £100k and a £25k deposit, the mortgage company will only lend on a first charge basis. This means if anything happens, they get their money back first.

In your situation, the mortgage company would be first charge and you would have a second legal charge. This would probably be ok if the charge was applied post completion, although they still need first charge authority..

No lenders will accept a second charge on entry, although you could get a mortgage offer (see Halifax response) the solicitor would then alert the lender who I think would pull the offer..

This is only my understanding though, so not gospel...

Hope this is sort of clear...

holly_hobby

As DH explains mge lenders always demand 1st charge on the mortgaged property - which means they have first dibs on the capital released on disposal.

The registration of any further charge requires the express premission of the 1st chargee i.e the mortgage lender - some give, some don't - so you may end up loaning the capital with no security on the property, if the lender rejects the appliction.

If the lender agrees, you may find that they require the charge to be under a "deed of postponement" - meaning that it will always retain a position of 2nd charge regardless of any further advance ( as order of charges are on a progressive date ascending order, meaning that when one charge is removed all those immediately behind move up a position i.e from 2nd to 1st, UNLESS they are under a deed of postponement effectively keeping them from 1st chargee position).

I would speak to the lender whom your partner is going to effect his mge with, and ask whether they would agree to the proposed 2nd charge under the circumstances - before you give any monies without effecting any additional suriety arrangements.

The other option, could be to arrange this on a private loan arrangement.

Both of the above would be administered by a Solicitor.

Hope this helps

Holly

AnnKittenplan

@DH

Thank you again. In fact he did get a mortgage, then revealed the Charge, and the mortgage was withdrawn.

We can't understand why you can attach a Second Charge to an existing mortgage, but you can't go in and declare the Second Charge up front when you apply for a new mortgage, but that seems to be what you are saying, and it is consistent with the facts in this case.

If this is true then you could have two people living next door to each other, Albert at number 27 is separated and has been granted a Second Charge on an existing mortgage, Brian at number 29 is separated but just moved in, applying for the identical mortgage to Albert with an identical Charge, and being refused.

This seems inexplicable.

holly_hobby

Its because as soon as the lender removes their charge, the 2nd charge (if not under a deed of postponement), automatically moves up to 1st position - as explained above.

Which is why your ex had the new mge offer withdrawn, as effectively the new lender was not able to secure 1st charge (once the exis mge had been redeemded and the lender removed the existing 1st charge), as the 2nd charge will proceed up the ladder to first postion (due to charges being ordinarilly registered in date application order - unless postponed as discussed) .

Therefore any existing or proposed 2nd charge (that is not to be redeemed upon mge redepmtion) needs to be effected under a deed of postponement (ie it will not move up the ladder upon the removal of the preceeding 1st charge), for any lender to even consider accepting it - as they DEMAND 1st charge position.

Ask your conveyencer or conveyencing Solicitor who should be happy to explain how the registration process works.

Hope this helps

Holly

Holly

AnnKittenplan

@hh

Also, Thanks.

I am awaiting for a proposal from his solicitor on how I can secure my 12½%, it may be the idea you suggest.

I'm still not clear on when Second Charges come into existence though.

At mediation four years ago we were told A Charge is the routine way to resolve this issue of protecting an investment. My conveyancing solicitor (30 years experience) says he has drawn up countless Charges with the routine Triggers I described, and now potential lenders are acting like we're from Neptune:

You've got a mortgage?
You're separated?
There's equity?
Why...it's unheard of!

I am still baffled, but the advice here has been very helpful. Again, Thanks.

AnnKittenplan

Looks like you were posting and got there before I did! I'll look over these moving Charges and try to make sense of them.

Thanks. I can honestly say I've never been more cnfosued.

holly_hobby

The issues you are having re the 2nd charge and how it is affecting the new mge issues, are due to the issues re date order of registration, and how that affects the lenders 1st charge registration position.

As I say you would be best placed to speak to the proposed new lender to ascertain their view on the application of a 2nd charge post completion, or how they would view an existing 2nd charge (effected under the suggested DOP) - as most insist on free title (ie the property to have no charges on the completion of the mge and advance of monies).

Your conveyencer to be fair is probably only used to dealing with 2nd charges to existing mges - which are pretty straight forward (if the lender agrees to the application of the charge).

What is causing the current issue is that you don't want to wait post completion to apply for registration of the charge - which is why a DOP is suggested (but still does not mean that the lender will accept the application with the existance of a 2nd chargee even with a DOP in place).

You also need to be aware that just because you have a 2nd charge does not guarantee that you will recieve the whole of your monies upon sale of the property. This is due to the mge lender having 1st and primary charge, whereby they are legally entitled to have the entire mge debt repaid from capital released on sale, which may even amount to the whole amount of capital released on sale (if prop prices drop/under auction or posession order) - even if that means by the mge lender receiving full discharge/payment, the remaining 2nd chargee etc, will receive only part or none of their registered debt.

Therefore if you want a cast iron gte as to the repayment of your monies, having a charge won't provide this. A 2nd charge will gte that you will be considered for payment on disposal of the property, after redemption of the mge lender holding 1st charge, but does not gte that you will receive any or all of your monies back - depending upon the residual capital left after repaying the mge lender.

Hope this helps

H

Dave_Ham

holly_hobby wrote: »

The issues you are having re the 2nd charge and how it is affecting the new mge issues, are due to the issues re date order of registration, and how that affects the lenders 1st charge registration position.

As I say you would be best placed to speak to the proposed new lender to ascertain their view on the application of a 2nd charge post completion, or how they would view an existing 2nd charge (effected under the suggested DOP) - as most insist on free title (ie the property to have no charges on the completion of the mge and advance of monies).

Your conveyencer to be fair is probably only used to dealing with 2nd charges to existing mges - which are pretty straight forward (if the lender agrees to the application of the charge).

What is causing the current issue is that you don't want to wait post completion to apply for registration of the charge - which is why a DOP is suggested (but still does not mean that the lender will accept the application with the existance of a 2nd chargee even with a DOP in place).

You also need to be aware that just because you have a 2nd charge does not guarantee that you will recieve the whole of your monies upon sale of the property. This is due to the mge lender having 1st and primary charge, whereby they are legally entitled to have the entire mge debt repaid from capital released on sale, which may even amount to the whole amount of capital released on sale (if prop prices drop/under auction or posession order) - even if that means by the mge lender receiving full discharge/payment, the remaining 2nd chargee etc, will receive only part or none of their registered debt.

Therefore if you want a cast iron gte as to the repayment of your monies, having a charge won't provide this. A 2nd charge will gte that you will be considered for payment on disposal of the property, after redemption of the mge lender holding 1st charge, but does not gte that you will receive any or all of your monies back - depending upon the residual capital left after repaying the mge lender.

Hope this helps

H

Holly explains this much better than I could, but what she is saying is absolute fact.

It is a bit chicken and egg, as you want the protection that a charge will give you although you cannot place it on (and not guaranteed) until after you have handed over the money. This is a fairly common issue and depending upon income, mortgage value and general future plans you may be better suited going on the mortgage and having a lower stake in the property.

Hard to say without full facts, although you are naturally tied to your ex by finances and children and may give you a solution.

Aside from that a "deed of trust" may be able to be written away from the mortgage and then put as a charge further down the line, but does not give you 100% security.

I do not suppose your ex has any other assets you could register a charge against or maybe a parents property in the short term - just an idea not sure how practical..

I wish you well..