"They might not be able to borrow as much as they could, or at a higher rate, due to the prescribed approach of using the ONS figures, and this is where a second charge could work out better."
The weekly food shop, for example, for two neighbouring households both on a similar income, might be very different – one perhaps choosing to shop at a budget supermarket like Lidl and another choosing Waitrose for instance.
Other costs such as travel, childcare and clothes can all fluctuate from person to person, which is why when it comes to affordability, it’s important we look beyond the figures from the Office for National Statistics (ONS).
The ONS data is still used by many lenders as a benchmark for assessing a borrower’s expenditure and thus affordability. Since the start of the year, we have seen several first charge mortgage lenders update their affordability assessments to reflect the most recent ONS household expenditure figures.
For those borrowers who sit comfortably within the affordability perimeters of a first or second charge mortgage rate, this method might not pose any obstacles but for those who are borderline, a more personalised approach could be beneficial.
As we move further out of a low interest rate environment and the cost of living continues to escalate, a borrower’s affordability is going to be at the forefront of lenders’ minds when they come to remortgage. There will undoubtedly be some who err on the side of caution.
Instead of applying a blanket formula to a borrower’s expenditure, Open Banking enables us to look at a borrower’s most up-to-date financial information and determine their current financial situation and spending habits.
This is vital when it comes to determining whether they can afford to repay a second charge mortgage. Assessing a borrower in this way gives us a better understanding of their financial make-up than simply referring to the figures from the ONS and because of this it could lead to higher acceptance rates and a second charge could allow them to borrow more than a remortgage.
A borrower might be looking to raise additional funds through a remortgage or further advance for either home improvements, a holiday or other life event but might find their affordability has changed since they last remortgaged. This could be due to Covid, a new job or a stricter approach to affordability from their first charge lender due to the rising cost of living.
They might not be able to borrow as much as they could, or at a higher rate, due to the prescribed approach of using the ONS figures, and this is where a second charge could work out better.
An increased focus on affordability means we could start to see a divide between those lenders who take a formulaic approach to affordability and those that use Open Banking.
The second charge mortgage market continues to gain momentum and part of this could be attributed to the less rigid approach many lenders in the market offer.
The latest figures from the Finance & Leasing Association (FLA) show new business volumes in the second charge mortgage market reached their highest level since September 2008 in March 2022. There were 3,058 new agreements during the month – a 42% increase on March 2021. At £139m, the value of second charge mortgages was also up 53% on March 2021.
On a wider scale, in the 12 months to March 2022, the number of agreements was 79% higher than in the previous 12 months and up 89% in terms of value.
We are seeing a similar trend within our business and continue to see second charge lending volumes rise.
For borrowers looking to raise additional funds through a remortgage, looking at all the options available - such as a second charge - will be vital to secure the best outcome for your clients.
