Rising housing equity an opportunity for second charges

As house prices continue to edge upwards, homeowners may discover this opens the door to refinance options which were once closed to them – such as a second charge.

Related topics:  Blogs,  Specialist Lending
Kerri Pender | Evolution Money
20th April 2022
Kerri Pender Evolution Money
"As a second charge is lent against the equity in a borrower’s home, the more equity a borrower has, the better the rate and options open to them are."

The recent news from Nationwide Building Society that house prices have on average risen 14.3% since March 2021, has the potential to improve the financial standing of many. A £300,000 property for example could now be worth £342,900.

When tracked over a two-year period, Nationwide’s data shows that since early 2020 when the pandemic first struck, the average UK house has increased in value by 21%. In real terms, this means a property worth £300,000 at the start of 2020 could now be worth £363,000.

The increase in property prices has been felt the most in Wales, with Welsh property prices seeing an annual increase of 15.3%, according to Nationwide.

While house price growth is expected to slow somewhat in the coming months, the Royal Institution of Chartered Surveyors (RICS) is still predicting continued growth over the next year.

As a second charge is lent against the equity in a borrower’s home, the more equity a borrower has, the better the rate and options open to them are. This could be good news for those borrowers who are looking to organise their finances or consolidate debt in light of recent surges in the cost of living.

Our latest Evolution Money Second-Charge Tracker showed debt consolidation accounted for 73% of our business by volume and 63% by value between December 2021 and February 2022. The average LTV among debt consolidation borrowers during this period was 72% and the average amount borrowed £22,184.

A second charge however is not just for those looking to consolidate debt. At Evolution Money we continue to see borrowers with a prime credit rating benefitting from a second charge.

Our Tracker shows an increase in both volume and value for prime borrowers accessing second charge mortgages. Between December 2021 to February 2022, 27% by volume and 37% of our second charges by value were utilised by prime borrowers – an increase on the previous two iterations. They borrowed on average £34,087 at an average LTV of 67%.

The increase in prime borrowers looking to second charges is perhaps not surprising given the record low rates the first charge market has enjoyed for five-year fixed rates in recent years.

Such borrowers will have tied in and may face large ERCs if they look to remortgage now and in the future. A second charge could potentially be cheaper for such borrowers if they are looking to raise additional funds, as they would be able to keep their first charge in place.

The last five years has seen a surge in the popularity of five-year fixed rates which have proved to be the product of choice. Santander recently revealed that over half of its mortgages in 2021 were taken out on a five-year fixed rate.

Data from Moneyfacts shows the average five-year fixed rate stood at 2.88% in March 2022. Although this was an increase on 2.71% in February 2022, it is still broadly in line with March 2017 when the average five-year fix was 2.93%.

The self-employed and those with minor credit blips may also find more options open to them in the second charge space or be eligible for a second charge loan for the first time if they have seen the equity in their property rise.

Such borrowers may be unable to borrow additional funds from their first charge lender, or their credit rating may have worsened during the pandemic.

For those homeowners who have experienced a rise in equity, it might be worthwhile looking again at what a second charge can offer.

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