"Advisers of all kinds will have clients who may benefit from considering a second charge mortgage in order to consolidate their existing debts."
It revealed that almost 3,000 new deals were agreed in May, worth a total of £133 million. That’s up by 43% and 53% respectively on the same point last year, while the increases are even stronger when you look at the level of lending in the 12 months to May compared to the previous 12 months. Lending is now largely back to the levels we were seeing before the pandemic
A big driver in the rise of second charge business at the moment is debt consolidation. Over recent years, when cheap credit has been plentiful, there has been a significant amount of aspirational borrowing - using personal loans and credit cards to purchase a new car, a big holiday and home improvements, for example.
However, circumstances are changing somewhat now. Interest-free credit cards are not quite as widely available as previously, while rising household bills mean that most people have less disposable income to devote towards servicing the costs of unsecured borrowing.
Second charge mortgages are a fantastic option for homeowners in this position. They can consolidate their various debts into a single loan, without having to remortgage or touch their outstanding first charge mortgage, instead making use of the equity stake they hold in their home.
However, one element of second charge lending that is often overlooked for debt consolidating borrowers are the loan-to-values on offer. There are now a handful of different names who are willing to consider second charge mortgages at high LTVs, in some cases going to the full 100%.
This is a level of borrowing that can make an enormous difference to borrowers who want to get their finances into better shape.
A short-term solution
Now, it’s certainly true that unlocking substantial amounts of equity held in a property - or even the entire equity stake - in order to pay off some unsecured debts is far from ideal. All homeowners want to be mortgage-free as soon as possible, and that includes second-charges on top of their regular mortgage.
However, it’s important to remember that second charge loans are often something of a short-term proposition. While the loan itself may be taken out over a lengthier term, say 20 years or so, that is simply to keep the repayments at a manageable level.
What we tend to see is the borrower remortgaging for a higher sum once their first charge mortgage reaches the end of its fixed term, and using the equity built up in the interim to pay off the remainder of the second charge.
That’s why in our experience, second charges are usually only in place for two to five years. It’s also worth noting that many second charge deals come without early redemption charges, making it much easier for clients to pay off those loans at a time that suits them, rather than having to wait for a charge period to come to an end.
Confidence in property prices
This strategy obviously relies somewhat on property prices continuing to rise. It’s only through that capital growth that homeowners will see their equity stakes increase after taking out the second charge, allowing them to remortgage down the line and clear the loan off.
The last few years have seen an extraordinary rate of house price growth that is unlikely to be sustainable for the long term. For example, according to the latest figures from the Office for National Statistics, house prices rose by an incredible 12.8% in the year to May.
In cash terms, that means the typical property gained £32,000 in the prior 12 months. That’s on top of the excellent capital growth since the start of the pandemic.
Double-digit annual growth is not necessarily something that will continue. However, even with the economic difficulties ahead, there remains enormous confidence in the market around the prospects for further house price growth. After all, advisers know full well that there remains significant demand from potential homebuyers, which combined with the underlying housing shortages is likely to support further house price increases.
It’s because of this confidence that second charge lenders are willing to offer products at such elevated LTVs.
Helping homeowners
The second charge mortgage market is a specialist one, an area of property finance that not all advisers will be comfortable with. However, advisers of all kinds will have clients who may benefit from considering a second charge mortgage in order to consolidate their existing debts.
As a result, it’s crucial for intermediaries to consider how they can support those clients. Partnering with experts in the sector can be a straightforward and effective way of doing so; firms like ours have the necessary knowledge and expertise to not only know which lenders are best placed to help those clients, but also how to package the deal to ensure it has the best chance of approval.
