Second charge mortgages can meet this crisis

Maeve Ward, director of commercial operations at Central Trust, explores how the amount of equity many people have built up in their property can help pay down existing debt and help homeowners during the cost-of-living crisis.

Related topics:  Blogs,  Specialist Lending
Maeve Ward | Central Trust
18th October 2023
Maeve Ward
"Raising any needed extra funds through a second charge mortgage to sit alongside their first charge thus enables the homeowner to keep their original rate."

It has been two years since the perception of the rise in the cost of living went from a bump in the financial road to full-blown crisis. Sadly, this situation looks to continue for some time yet.

And like a lot of large financial situations, there are impacts that hit the headlines immediately, such as the increased use in foodbanks, and there are the long-tail effects that take time to show. These are starting to do so now.

An example of one of these lies in housing. The struggle that first-time buyers face in both raising cash for a deposit and getting through tighter criteria is an obvious flashpoint and has been well documented by the press. But existing homeowners face challenges too and should not be forgotten.

For example, according to Bank of England (BoE) figures released in September, the value of outstanding mortgage balances with arrears increased by 13%, from Q1 2023 to Q2 2023, meaning a 28.8% jump over the year. This is after years of a gradual decline in this metric.

Stored equity

However, one aspect of the UK mortgage market that may serve homeowners well if the cost-of-living crisis continues to bite is the amount of equity many people have built up in their property.

In fact, data from Uswitch published in June this year describes 63% of mortgages advanced in Q4 2022 being done so with an LTV of 75% or less, giving a snapshot of how the market stands today.

For some borrowers, releasing a portion of this equity would enable them to pay down any existing debt they have, taking advantage of the lower rates that borrowing against a property attracts.

In past eras, taking on a further advance would have been the preferred method of doing this. However, we have recently witnessed large changes in the circumstances of many people and this type of mortgage is no longer suitable for them. Homeowners who have moved into self-employment or those who have experienced some form of adverse credit are two obvious examples of this.

Enter second charges

It wasn’t long ago that second charge mortgages had a poorer reputation than other forms of secured borrowing. This has changed massively. One reason for this is because of the huge changes that have reshaped the mortgage.

For example, first charge residential rates having been so low for so long and then suddenly increasing in the BoE’s bid to counter inflation, many homeowners find today’s remortgage rates to be far too high. Raising any needed extra funds through a second charge mortgage to sit alongside their first charge thus enables the homeowner to keep their original rate.

Situations like these have enhanced competition in the second charge space, lowering prices and upping product quality.

Being a solution led lender, we see it as our role to bring these improved second charge products to as many people as possible – particularly those who the mainstream lenders often deem to be too risky to lend to.

After all, we believe that many homeowners who no longer seem a safe bet by the big banks could be simply suffering historically trying circumstances rather than demonstrating poor financial behaviour. Or perhaps they believed in themselves and their business enough to strike out on their own. A second charge mortgage could serve as the perfect fit for this type of borrower – and many others.

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