"For far too long, second charge mortgages have been linked to borrowers with a history of adverse credit, or considered to be too expensive or too complicated."
One of the greatest challenges facing the second charge mortgage market is the preconceptions that are often held by many people both inside and outside the mortgage industry.
For far too long, second charge mortgages have been linked to borrowers with a history of adverse credit, or considered to be too expensive or too complicated.
Yet the evolution of the market over the last 20 years has seen the sector change significantly, with faster processing times, increased competition and heightened demand from all types of borrowers.
While the perceptions of the industry are perhaps founded on some historical truths, the fact of the matter is that the industry must work harder to help change the way people think about second charge mortgages.
There has been a lot of focus in recent years about the use of second charge mortgages as a capital raising tool for debt consolidation purposes for those with a history of adverse credit. This has mainly been due to the growth of the product on the back of the challenging economic conditions many people have faced since the onset of the Covid pandemic.
While this may have contributed to the ongoing perception of second charge mortgages being a product of last-resort for those looking to clear their outstanding debts, the fact is that the use of second charge mortgages has grown in recent years to become a key component of the modern-day mortgage market.
In fact, second charge mortgages are suitable for all types of borrowers and all types of credit profiles in situations where capital raising is required. Whether the client chooses to take out the product or not is another question, but it should always be a consideration for any homeowner looking to raise funds.
In the current higher interest rate environment, one of the most common reasons for a borrower to take out a second charge mortgage is to safeguard the preferential rate on their first charge loan. Many of these people will also have clean credit profiles, but with two or three years left to run on their current deal, they would prefer not to remortgage.
Some may want to raise capital to carry out home renovation products, while others may want to pay school fees, pay a tax bill or finance a holiday. Either way, taking out a second charge allows them to raise the money they need while keeping the lower rate on their first mortgage intact. It also leaves them free to consider clearing the second charge when the time comes to remortgage.
Another reason a borrower may consider a second charge is because they have maxed the borrowing limit with their current mortgage provider. As income is calculated differently on second charge loans, it may well be that this is the solution they need when a remortgage or further advance is not an option.
The speed at which many second charge loans can now be processed is also an attractive feature of the product. Brokers and lenders have worked hard over the last two decades to streamline the application process and make it easier and more efficient for everyone involved.
Turnaround times in the sector are improving every day, and in some cases, loans can be processed within a week. Similarly, increased competition also means that rates are now the closest they have ever been to mainstream mortgages and with a handful of new entrants expected to enter the market later this year, competition looks set to increase even further.
This is great news for the market and means more choice and even better rates for borrowers. Second charges are often referred to as the poor cousin of the first charge market, but growing demand and increased awareness clearly demonstrate that this mindset is slowly starting to change.
There is so much opportunity for brokers to tap into this underserved sector of the mortgage market and for those that find it difficult or don’t know where to start, speaking to an experienced specialist lender, packager or broker familiar with the market is a good starting point.
There is no other product in the mortgage market that works exactly the same way as a second charge and in situations when remortgaging is not best advice or even an option due to large redemption penalties or loss of a preferential rate, a second charge can offer borrowers the solution they need.
As an industry, it’s time we changed the narrative around second charge mortgages and worked towards educating borrowers, lenders and brokers on the importance of this capital raising tool by making it part of the conversation whenever capital raising is required.
