Second charge mortgage activity has picked up massively at the start of this year. Lenders have cut rates, which are now much more in line with customer expectations.
Customer demand has always been there but people were perhaps holding off while the economy was so unsettled. Now that the outlook appears more certain, it feels like there’s a bottleneck of demand.
The level of enquiries is significantly higher than we saw last year. And I am speaking to more and more brokers who are venturing into second charges for the first time.
Consumer education remains vital. Brokers can help
When it comes to the uses of loans, we continue to see demand for funding for home improvements. However, it seems that more brokers are using second charge lending as a proactive financial planning tool.
These brokers are engaging with their clients in good time ahead of the end of their current deal, to fully understand their debt profile and financial position, and plan for all potential outcomes.
In some cases, debt consolidation can be a sensible tool for a client to use to put themselves in a stronger position to remortgage. If a borrower holds a number of disparate debts, they could be paying premium interest rates on each of them with no end in sight. A second charge mortgage may be suitable to streamline their debts into one monthly amount. It can help to lower their monthly outgoings as well as reduce the chance of accidentally missing a monthly payment.
It is expected that new lenders will enter the market this year, and this will help the momentum
It’s obviously important that care is taken when selecting which debts to consolidate — if any. A lower monthly outgoing could end up being more expensive in the longer term when considering fees for the second charge mortgage and repaying that debt over an extended period of many years.
However, ahead of a remortgage application, affordability will be based on income versus monthly outgoings. So, reducing the amount spent on servicing credit will be positive.
Known quantity
In addition, a second charge mortgage is a known quantity. It will have a fixed end date, or a planned date when it will be absorbed into the main mortgage.
Customers with open accounts on revolving credit have the potential to significantly increase their borrowing in the future without the need to apply for further credit. So, by paying off these accounts, and then closing them, borrowers can put themselves in a stronger position to secure the right remortgage for their
It’s clear that more brokers are recognising the benefits of second charge mortgages
Used sensibly and effectively, debt consolidation can also be a realistic route to becoming debt free because the balance will be paid off eventually. So, used correctly, it can be wise to pay off the balance of the longer-term or open-ended facilities.
Detailed analysis
In addition to verifying if certain debts should or should not be consolidated, the value of speaking to an experienced second charge broker is clear.
They will be able to assess and advise a client that, while monthly payments may seem cheaper following debt consolidation, it is often the case that extending unsecured debt over the longer term of the mortgage means in fact paying a higher interest charge overall.
It seems that more brokers are using second charge lending as a proactive financial planning tool
Coupled with a strategy of adding previously unsecured debts to their mortgage balance, this could also have future impacts on the property loan-to-value and monthly mortgage repayments, in the event that house prices fall or interest rates rise.
Only following a detailed analysis of all the risks by a suitably experienced second charge broker should a recommendation for consolidation be made.
Overall, it’s clear that more brokers are recognising the benefits of second charge mortgages, and the outlook is positive.
Rates have become more competitive and we are currently working with more customers and new brokers. It is also expected that new lenders will enter the market this year, and this will help the positive momentum.
Lenders have cut rates, which are now much more in line with customer expectations
Consumer education remains vital. The recent Specialist Lending Study from Pepper Money found that only 12% of people would consider a second charge mortgage if they wanted additional borrowing secured on their home.
So there is still work to be done.
Brokers can help with this education and, as more brokers switch on to second charges and talk to their clients about this capital-raising route, I firmly believe that consumer awareness and consideration of the product will build.
Stewart Simpson is second charge specialist at Brightstar Financial
This article featured in the March 2024 edition of MS.
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