Second charge lending reflecting cost of living crisis: Evolution Money

Borrowers are looking at shorter-term alternatives, such as second charge mortgages, in order to meet shorter-term financial needs.

Related topics:  Specialist Lending,  Second charge
Rozi Jones
14th December 2022
a man looks at a coffee table covered with receipts and a calculator
"Many borrowers are looking for alternatives to straight remortgaging which would undoubtedly cost them more than their existing first charge."

The market for second charge borrowing is continuing to reflect the wider economy and the financial concerns of individuals seeking to get a grip on an increase in both the cost of living, and the cost of securing finance in general, according to the latest research from Evolution Money.

The lender has revealed the latest results from its quarterly data tracker, which reviews borrower types, average mortgage sizes, LTV, and further information to offer advisers insight into the reasons why a second charge mortgage might be suitable.

Evolution Money analyses data from two different types of second charge mortgage products, split between those borrowers using the loans for debt consolidation purposes only, and those clients who have prime credit ratings.

This iteration of the tracker mirrors the last in terms of both volume and value of second charge mortgages taken by both sets of borrowers, with the number of prime borrowers utilising the products holding steady. Prime borrowers are able to use their loans for other purposes, not just debt consolidation.

Looking at its total lending data for the last three months, up until the end of November 2022, the product split by volume of mortgages is once again 68% debt consolidation/32% prime, and by value 59% debt consolidation/41% prime.

The lender said that while pricing in the first charge mortgage space had begun to come down off recent post-Mini Budget highs, it was still considerably higher than earlier in 2022.

The lender said a full first charge remortgage now in order to secure finance was inevitably going to be at higher rates and monthly mortgage amounts than originally arranged plus may incur an early repayment charge, and Evolution added borrowers were therefore looking at shorter-term alternatives, such as second charge mortgages, in order to meet shorter-term financial needs.

This iteration of the Tracker continues the trend whereby, for those borrowers specifically using a second charge mortgage for debt consolidation purposes, the average loan amount had continued to increase, and was now over £25,000.

The average term for these borrowers had also increased again to 135 months, with borrowers seeking longer terms which would make the monthly payments more manageable. The average LTV was also up, and borrowers continued to consolidate more debts than their prime borrower counterparts, with the average value of debts consolidated also inching up again to £18,322.

The data also shows the most common uses of a debt consolidation second charge mortgage. 55% were using the money to pay back a loan provider, followed by over 25% paying a bank – both having dropped in number since the last iteration – while 14% were paying off retail credit.

For prime borrowers, the average loan has also increased by a sizeable amount to over £37k, with the average term up to 158 months, with the average LTV continuing up at 68%.

Prime borrowers are increasingly taking out second charge mortgages for debt consolidation (up again to 68% from 63%), home improvement (15%) and home improvement with some consolidation (13%).

This quarter prime borrowers were using their money to fund a more diverse range of uses including business loans/existing business ventures, further education costs, holidays, vehicle purchases and two clients using the money to pay for weddings.

Steve Brilus, CEO of Evolution Money, commented: “This latest Tracker shows what is happening right across the financial spectrum for many individuals in the UK right now, with pressures from high inflation continuing to bite and the increased cost of first charge mortgage rates meaning many borrowers are looking for alternatives to straight remortgaging which would undoubtedly cost them more than their existing first charge.

“Add in the potential for early repayment charges, plus increased costs for other types of borrowing, and it’s not surprising to see homeowners looking at the ways and means by which they can extract equity grown over the last few years, specifically to pay off higher-charging debts, but also to fund other commitments.

“Average loan amounts have increased for both prime and debt consolidation borrowers, plus the terms have also increased as borrowers seek to make monthly second charge payments affordable.

“As a result, we are continuing to see prime borrowers looking at their second charge options and would anticipate this will continue throughout 2023 even if, as anticipated, inflation does start to fall back and there is a corresponding drop in first charge mortgage rates.”

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