Second charge mortgages - a 2023 look ahead

Jasdeep Bhogal, senior regional development manager for London and South at Shawbrook, explores the rising popularity of second charge mortgages and why brokers should ensure that second charge mortgages are a key part of their arsenal.

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Related topics:  Specialist Lending
Jasdeep Bhogal senior regional development manager for London and South at Shawbrook
28th March 2023
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The learning objectives for this article are to:

  • Understand the factors in 2023 that are making second charge mortgages a viable option for some customers
  • Learn how second charge mortgages could be used by landlords to improve the energy efficiency of their portfolios.
  • Understand what a second charge mortgage could be used for.

According to the Finance & Leasing Association (FLA), the number of new second charge mortgage agreements in January 2023 was up 8% on/over January 2022. The value of this new business was £103m, a jump of 14% on the previous year. So why are second charges mortgages on the rise and why should they be part of every broker’s repertoire, particularly in 2023?

Utilisation in 2023

As the UK continues to grapple with the cost-of-living crisis and the financial challenges that continue to be felt by households across the country, second charge mortgages should be a key part of every broker’s repertoire to help their clients raise the finance they need, particularly for the year ahead.

With mortgage interest rates rocketing over the past six months, customers who need to borrow money may feel discouraged to remortgage for fear of losing their favourable first charge interest rate. A second charge mortgage provides one viable solution to raise funds tied up in the value of their property over similar terms, whilst leaving their favourable first charge in place.

With a second charge mortgage, a customer only pays the higher rate and extra interest on the new amount they want to borrow, which could be more cost effective than remortgaging their full balance at a higher interest rate. Many lenders also offer no early repayment charges on second charge mortgages, which offers customers the flexibility to repay their loan as and when they choose.

Similarly, as lenders tighten their lending criteria and affordability requirements due to the cost-of-living crisis, customers with complex income structures may also find it more difficult to remortgage with their current lender. So again, a second charge mortgage could prove to be a solution for those looking to borrow.

Debt Consolidation

Unfortunately, another consequence of the cost-of-living crisis is that more people are likely to fall into debt. According to StepChange Debt Charity’s latest findings, they had more than 18,000 new clients completing full debt advice in January 2023, which is higher than any single month in 2022, with almost one quarter of new clients citing ‘a cost-of-living increase’ as their main reason for debt in January 2023. Whilst there are many ways that customers can manage their debt, one way could be to consolidate their outgoings into one second charge mortgage.

This can make repayments more manageable as the debt can be combined into a single monthly outgoing and be spread over a far longer term than credit cards or a standard unsecured loan. It’s worth noting that customers may pay more interest managing their debt this way.

Home Improvements

Second charge mortgages can be an effective solution to raise capital for home improvements, particularly with the challenging financial landscape. This is especially worth considering given the proposed EPC regulation changes set to come into effect in 2025, which will impact landlords who own buy-to-let properties.

Data from Shawbrook’s whitepaper, Confronting the EPC Challenge, found that on average, landlords expect the improvements to cost £5,900 per property to bring their portfolio up to the required C rating, but only 31% currently have the necessary funds available to pay for the proposed changes. This could work out particularly costly for landlords with multiple properties within their portfolio that miss the EPC C rating target.

Close to a quarter (23%) of landlords also said their properties are currently rated D or below for energy efficiency. Should the proposed EPC regulations be implemented, they would face being unable to begin a new tenancy from 2025, unless they make improvements to their properties.

Using a second charge means that landlords are able to utilise their investment property’s value to make the improvements to their portfolio and spread the cost over a longer term, which could prove more beneficial than other short term finance arrangements such as personal loans or credit cards.

Other Needs

Whilst second charge mortgages are most commonly used for consolidating debt or home improvements, there are in fact a number of different use-cases they can be applied to, including:

• A wedding
• A holiday of a lifetime
• Extending a lease
• Business purposes
• A deposit for an additional property purchase
• To purchase a car (maximum term of 5 years)
• School fees
• To transfer equity

Cost and conclusion

Whilst it’s true that second charge mortgages do tend to have higher interest rates than a first charge, rates have been coming down lately, closing the gap in cost of borrowing. Second charge mortgage rates tend to be higher because the risk to the lender is greater than that of a first charge. Despite the higher rates, however, the overall cost of borrowing may be cheaper. This is because customers taking a second charge can take a shorter term and only on the portion of funds they need, rather than remortgaging the whole balance. And they may repay their loan early without early repayment charges, therefore paying less overall in these circumstances.

Customers also won’t want to lose their existing mortgage rate in order to remortgage to raise the additional finance they need, which makes a second charge mortgage potentially a more attractive alternative. With this in mind, brokers should assess changes in affordability criteria, weaker credit scores or other financial implications brought on by the cost-of-living crisis and those with complex income needs, and assess whether a second charge mortgage may be a better fit to raise the funds they need. However, though second charge mortgages are worth taking into consideration, they may not always be the best solution, and could be fairly expensive for some borrowers, so other forms of credit and capital raising options may be a more viable for certain customers to consider.

Looking ahead for the remainder of 2023, brokers should ensure that second charge mortgages are a key part of their arsenal in order to maximise opportunities and provide customers with appropriate funding solutions, which won’t compromise existing mortgages.

Now complete the questionnaire below to earn your CPD.

To recap, this article has helped you...

  • Understand the factors in 2023 that are making second charge mortgages a viable option for some customers
  • Learn how second charge mortgages could be used by landlords to improve the energy efficiency of their portfolios.
  • Understand what a second charge mortgage could be used for.
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