"The skills required to advise on a second charge are fundamentally no different from those needed for a standard mortgage."
Since February, there has been a noticeable drop in year-on-year second charge lending figures. Recent data from the Finance & Leasing Association (FLA) shows the volume of second charge business is down by just under 10% from last year.
While certain market conditions can explain part of this fall, I suspect lending volumes could be significantly higher if there was better understanding and adoption of second charge mortgages. Although the second charge market has made substantial progress in recent years, there is still more that could be done in terms of integration with the first charge market.
Hesitation remains among some advisers when it comes to recommending a second charge, with some still harbouring the misconception that advising on a second charge product is significantly different or more complex than dealing with a first charge. However, this is not the case, as the skills required to advise on a second charge are fundamentally no different from those needed for a standard mortgage.
Over half of second charge mortgages are currently used for debt consolidation purposes. Consequently, some of the borrowers seeking second charges often have more complex financial situations than those typically encountered by some first charge mortgage brokers. While there may be slight differences and a need for specialised knowledge on occasion, numerous lenders and master brokers are available to guide mortgage brokers in the right direction.
Perception also poses a challenge for some advisers, as second charge mortgages can at times, still be perceived as risky. second charges are no more risky for borrowers than first charges however, as long as the loans are affordable for the borrower and advised correctly. The second charge market has been regulated by the FCA since 2016, with the sector adhering to the same rules as the first charge market.
As market conditions evolve and interest rates remain high, the role of second charges will become even more prominent to the extent that it is a market brokers cannot ignore - especially in light of Consumer Duty. Considering the current market conditions, we anticipate second charges will become even more prevalent. This further underscores the importance for mortgage advisers and mortgage networks to consider the benefits of a second charge over a remortgage.
Economists have recently predicted the Bank of England Base Rate could rise as high as 7%. In an environment of increasing interest rates, first charge mortgage borrowers are opting for long-term fixed rate mortgages. Consequently, in the coming years, there will be a need for solutions to help these borrowers raise additional funds without disturbing their first charge mortgage.
A second charge may work out cheaper than a borrower disturbing their first charge mortgage and paying a large early repayment charge.
Likewise, we are likely to see a continued clear demand from borrowers who have a considerable amount of debt that requires consolidation. The second charge mortgage market is well positioned to meet the needs of such borrowers. By consolidating debt, a first charge mortgage borrower may be able to better manage their debt or lower their monthly payments by prolonging the term of the second charge.
By improving awareness and recognising the value and suitability of second charges, advisers can help provide borrowers with additional options for meeting their financial needs.
While a lack of familiarity may be holding some back, it is important to explore the benefits of second charges, and help guide borrowers toward the solutions that best suits their needs. This is even more important in the current fluctuating market where borrowers’ circumstances might be changing much more frequently and where the consequences of this could be felt far more deeply if no action is taken.
