Second charge continues its steady march

The challenges faced by borrowers over the last few years has seen the second charge market’s popularity soar. Rising living costs and higher interest rates saw demand for the product increase significantly over the last 12 to 24 months as borrowers looking to capital raise opted for a second charge over a remortgage to fund their financing needs.

Consecutive hikes by the Bank of England (BoE) saw the base rate rise from 3.5% to 5.25% between January and August 2023, driving up the cost of borrowing to levels not seen since the start of the global financial crisis.

As a result, borrowers needing to capital raise but locked into longer-term fixed rate mortgages taken out at the start of the Covid pandemic, have opted to retain the preferential rate on their first charge mortgage and take advantage of the generous and less stringent affordability assessment used to determine second charge loans.

Although recent figures from the Finance & Leasing Association (FLA) show a drop in demand of 22% for this type of financing in September 2023 compared to the same period last year, the significance and increased awareness of the sector among brokers and borrowers is crucial as we head into 2024.

Overall, the economic outlook for the UK has started to show signs of improvement, with inflation falling sharply to 4.6% in October, its lowest level for two years, and the BoE base rate remaining unchanged since August 2023.

All these signs point to a more optimistic economic environment over the next 12 months and more favourable conditions for those borrowers looking to capital raise, particularly for those who may still find themselves in need of additional funding either to consolidate debt or to carry out home improvements within the next year.

In each of these cases, a second charge mortgage could still prove to be the best option for their individual circumstances, particularly if they opted for a low-rate longer five or ten-year fix before interest rates started to climb.

As a result, many of these borrowers are likely to be on a rate of sub 2% and will understandably be reluctant to relinquish this preferential rate by remortgaging to release capital. Instead, they can take out a second charge and use the money to pay off or consolidate debt into a single and more manageable amount and get back on an even keel.

Not only will this help them to secure the funding they need while keeping this rate intact, it will also help them to avoid penalties such as early repayment charges for leaving the first charge loan early.

It is also worth remembering that second charge mortgages can also be used for business purposes such as paying off tax bills and there will always be situations where a client might need to raise capital quickly for this purpose. Taking out a second charge and releasing equity in an existing property is one way in which they can achieve this goal.

As we head into a new year, it is important that brokers ensure second charge mortgages remain top of mind for any client looking to capital raise to pay off debt, carry out home renovations or pay off a tax bill.

Second charge mortgages form an essential part of every broker’s toolkit and while the needs of every client are undoubtedly different, a second charge mortgage should always be considered as a possible funding solution for any client with capital raising needs alongside other solutions such as remortgaging or a further advance.