Extra loans open the door to risk

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The Independent Online
LOSING the family home to a double-glazing salesman may seem unlikely. But it is a real possibility for people who buy their new windows with a second mortgage sold as part of the package by the double-glazing company.

Many companies selling large items, such as windows and new kitchens, also offer loans to spread the cost. The money usually comes from a finance house but the loan is marketed by the company selling the item.

Door-to-door double glazing and home improvement salesmen were frequent visitors to homes in suburbs enjoying record house-price inflation in the late Eighties. Rising house values meant it was easy to sell second mortgages to finance the work.

Many homeowners have also taken out second mortgages to inject cash into ailing businesses or to repay other creditors through debt consolidation packages.

Second mortgages have the same legal status as mainstream mortgages. The property provides security for the lender if the borrower does not keep up repayments, and if the worst comes to the worst the lender will repossess the house. A lender may repossess a house for defaults on a second mortgage even if there are no problems with the first mortgage.

The second-mortgage company cannot take its slice out of the sale proceeds, however, until the first mortgage is repaid. With property values falling, many second-mortgage companies have seen their security eaten away. This can provide an incentive for them to repossess quickly.

Often these loans are small compared with the size of the main mortgage, perhaps just a few thousand pounds.

Unsecured loans also pose a threat to borrowers who default on payments but not to the same extent as a secured loan, as the lender does not have the automatic right to take the house.

These types of loan are regulated under the Consumer Credit Act and any company, from motor dealers to building societies, that wants to lend amounts up to pounds 15,000 must have a licence. An organisation that wants to act as a broker for secured loans must have a licence, regardless of the size of loan.

Licences are issued by the Office of Fair Trading (OFT) and between 1976 and 1991 the office issued 315,228.

To obtain a licence a company must fill in an application form that asks a variety of questions about the background of the individuals involved with the business. The OFT will make further inquiries before issuing the licence. Sole traders pay a fee of pounds 70 for a five-year licence. Partnerships and companies pay pounds 175.