The FCA’s increased scrutiny of the second charge market should be welcomed by anyone who believes in the value of good advice.
Recent work has understandably focused heavily on debt consolidation.
The regulator found examples where affordability assessments overlooked important expenditure, advisers did not sufficiently investigate why unsecured debts had accumulated, and alternatives to consolidation were not always properly considered.
Reducing monthly outgoings can create financial resilience
Those are valid concerns. But we need to be careful that scrutiny of poor practice doesn’t create the impression that using a second charge mortgage for debt consolidation is inherently a poor outcome. Because it simply isn’t. The FCA itself has previously acknowledged that consolidating debts through secured borrowing can be the right solution for some customers, provided it is affordable.
Starting point
The important words are ‘for some customers’.
The starting point isn’t just whether someone qualifies for a second charge mortgage. We need to understand why they need it. If they have accumulated unsecured borrowing, there is little value in consolidating those commitments without understanding how they arose.
Was it a one-off period? Have household circumstances changed?
Are childcare costs going to increase? Is income likely to change? Consolidating £30,000 of unsecured borrowing, only for the customer to accumulate another £30,000 because the underlying affordability problem remains, would clearly not represent a good outcome. The objective has to be a sustainable improvement in the customer’s financial position.
Understand the customer’s circumstances and why the debt exists.
Examine expenditure properly
A second charge should also never exist in isolation from other options. Could the customer obtain a further advance from their existing lender? Would remortgaging be more appropriate? Should arrangements with existing creditors or another form of debt support be considered instead?
Compelling alternative
There are circumstances, however, where a second charge can offer a compelling alternative.
A borrower may have an attractive first charge mortgage that they don’t want to disturb. Remortgaging their entire balance to raise a relatively modest additional amount could mean moving significantly more borrowing onto a different rate.
A second charge allows that existing mortgage to remain untouched while additional borrowing is assessed separately. That doesn’t automatically make it right. It simply makes it an option worthy of consideration.
This is the most important conversation advisers need to have around consolidation. Moving unsecured borrowing onto a mortgage can reduce monthly expenditure considerably, but extending borrowing over a longer term can also increase the total amount of interest paid. It also turns previously unsecured borrowing into debt secured against the customer’s home.
The FCA’s increased scrutiny should be welcomed by anyone who believes in the value of good advice
Those trade-offs cannot be buried beneath an attractive monthly saving. The FCA specifically requires advisers considering debt consolidation to take account, where relevant, of the cost of increasing the repayment period and whether it is appropriate to secure previously unsecured borrowing.
Customers therefore need to understand both sides of the equation.
Meaningful improvement
But there is another side to affordability which shouldn’t be ignored.
For some households, reducing monthly commitments can create financial resilience that wasn’t there previously. If restructuring borrowing means they can stop living at the edge of their monthly income, start building savings and establish a buffer against unexpected expenditure, that can represent a meaningful improvement in their financial position.
Term is another important consideration. Our approach is to establish what is genuinely affordable while keeping the borrowing term as short as reasonably possible. Sometimes customers choose to align the second charge with their existing mortgage, while overpayment facilities can provide an opportunity to reduce the balance more quickly when circumstances allow.
The structure needs to reflect the customer’s circumstances rather than simply produce the lowest possible monthly payment.
There is nothing contradictory about supporting the FCA’s scrutiny while also believing strongly in second charge debt consolidation.
The regulator has previously acknowledged that consolidating debts through secured borrowing can be the right solution for some customers, provided it is affordable
The regulator is reinforcing what good specialist advisers should already be doing. Understand the customer’s circumstances and why the debt exists. Examine expenditure properly. Consider alternatives.
Explain the consequences of securing unsecured borrowing. Look beyond the monthly payment. And document why the recommendation represents the best outcome.
Do all of that and sometimes a second charge won’t be appropriate. But there will also be customers for whom consolidation through a second charge provides the breathing space and financial structure they need.
Andy Stean is second charge mortgage specialist at Brightstar Financial
This article featured in the September 2026 edition of Mortgage Strategy.
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Disclaimer: This story is auto-aggregated by a computer program and has not been created or edited by finopulse.
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