Second charge mortgages should be part of every broker's toolkit

Second charge mortgages should be part of every broker’s toolkit. The introduction of the Mortgage Credit Directive in 2016 essentially dictated that all brokers should consider a second charge mortgage alongside a remortgage in any capital raising situation. However, while the new regime was adopted by some, there are still many that are not considering second charges at all. There are a number of possible reasons as to why these brokers don’t feel comfortable in giving second charge advice, but the main explanation is that they feel they don’t know enough about second charges and therefore there is a real need throughout the intermediary sector for better education about them.

It’s also important to understand that brokers will rarely get a request to arrange a second charge; however, they will frequently be asked how they might be able to capital raise. This is where a second charge mortgage might be a viable and better customer outcome depending on the customer’s need both now and in the future.

The mortgage market is in a very different place to where it was 12 months ago. Back then, the Bank Rate was 0.1%, whereas it is now 3.0%, a situation that would have seem fanciful a year ago. At that time, Covid was still at the forefront of everyone’s minds. Now, while many borrowers (especially the self-employed) are still feeling the after-effects of the pandemic, they are also having to deal with the cost of living crisis. In the UK, this has been stoked by rising fuel costs, the the war in Ukraine and rising inflation (itself partly exacerbated by Brexit).

As a consequence, the ability to source a mortgage from high street lenders has been significantly curtailed for many borrowers.

The plight of the self-employed

The self-employed have been particularly affected by the pandemic and the cost of living crisis. According to research from the Centre for Economic Performance (CEP) at the London School of Economics and Political Science, the incomes and profits of self-employed workers are worse now than one year ago.

The report “Covid-19 and the self-employed: a two-year update” surveyed 1,500 people, a representative sample of the self-employed population, found that the current cost of living crisis is exacerbating the challenges for self-employed workers, whose incomes and profits have not fully recovered from the pandemic shock.

One-third of the self-employed reported difficulties meeting basic expenses – the same proportion as in August 2020. Within this, more than two-thirds (67%) of healthcare support workers reported financial difficulties about four times as many as those working in education (17%).

The impact of Covid-19 restrictions has reduced, but recovery has stalled in the face of the high costs of energy and raw materials. These are contributing to the financial difficulties of the self-employed, particularly small businesses. Over 40% of self-employed surveyed had monthly incomes of less than £1,000 in April 2022 – compared with 27% at this income level pre-Covid-19. Unsurprisingly, a third of those surveyed said the cost of energy is their most challenging issue.

The difficult conditions that the self-employed faced because of Covid proved too much to many; in fact, the report reveals that around 800,000 workers left self-employment during the pandemic. Despite the economy picking up after the final lockdown, the numbers going into self-employment remain relatively low.

The report added that the condition of the self-employed is already precarious and any major new challenges may tip many of them over the brink into severe financial hardship.

Debts

Rising energy bills are putting people under significant financial pressure. According to debt charity StepChange’s own client data, there was an increase in the proportion of clients in arrears with dual fuel (56%), electricity (31%) and gas (26%) bills, in September, compared to August 2022.

Furthermore, there has been a worsening in individual insolvencies. One in 405 adults (at a rate of 24.7 per 10,000 adults) entered insolvency between 1 October 2021 and 30 September 2022, according to official figures from the Insolvency Service. This is an increase from the 24.0 per 10,000 adults who entered insolvency in the 12 months ending 30 September 2021.

Difficulties with capital raising

Increasing numbers of brokers’ clients are looking to capital raise but are faced with the realisation that a remortgage is either harder to place, unable to be placed or not the right time; however, the capital-raising need remains.

The following could apply to clients:

• Are self-employed, having product switched locked in due to a new fixed rate
• Have a failing credit score
• Have had credit blips in the last three years
• Have high level of unsecured debt
• Have complex income streams
• Are falling short on income multiples
• Have recently changed job
• Have been self-employed for more that 12 months but less than two years
• Have property with non-standard construction
• Are in a debt management plan
• Are in an IVA
• Have taken out recent payday loans.

Specialist solutions

This is where the specialist market can help. From the outset, brokers need to focus on the right customer journey and managing expectations rather than focusing on rate. Borrowers need to understand that rates today are vastly different from the beginning of the year and that losing a preferential first mortgage rate could be a very costly outcome.

Instead, brokers should focus on the value associated with the outcome. By using criteria sourcing systems the broker can find a solution to the borrower’s circumstances and then by sourcing those lenders on the mainstream platforms can understand what rates are available.

Recognising when to look at alternatives to expensive or unavailable first charge options and being in control of how to source is the first step; placement is the next one. Options are either going direct to the lender or via a specialist distributor; which one is best will be the decision of each business. The key is to do something, as the customer still has that capital-raising requirement that they need solving - better they do that with you than someone else.

Second charges provide a short-term solution to help the borrower achieve their immediate requirements. They can ultimately refinance back to the high street when the time is right. This could be, for example, when they have the required employment history or consolidated their unsecured debts. Alternatively, when their credit blips have been cleared, the credit score in turn has increased so refinancing options will have become available.

It should be reiterated that, regardless of circumstances which might make the high street a less welcoming place for first charge mortgages, as mortgage rates continue to rise, those looking to capital raise, whether for home improvements, debt consolidation or a combination of the two (for example) should have an unsecured loan and second charge mortgage explored alongside a remortgage.

Education and awareness are required across the market as the stigma of second charges from 15-20 years ago still lingers today despite the reality of the market being vastly different: things have changed dramatically since then and so has the regulatory environment. Second charge lenders are doing their best to improve broker education but there is always more work to be done. The reality of today’s mortgage market means that brokers who are not up to speed on second charges could really be letting their clients down at a time when they need specialist mortgage advice more than ever.