Second charges perfect option for homeowners priced out of a move

It didn’t just mean large workloads for advisers and lenders though; it has also had an enormous impact on the value of the nation’s homes. The latest data from the Office for National Statistics’ house price index shows that in the 12 months to June, house prices in the UK rose by an incredible 13.2%. That’s the highest annual growth recorded since 2004.

While activity has slowed a little since the deadline passed, the reality is that house prices will not have fallen much, leaving plenty of homeowners frustrated with their current property but priced out of a move to a new home.

Don’t move, improve

One of the inevitable results of the pandemic, and the fact we have all spent so much time at home, has been that many people have questioned whether their current property really meets their needs.

The continued requirement to spend at least part of the week working from home may have made it clear to some that they simply need more space. There’s only so long that a person will want to put up with working from their kitchen table. Equally others may have an expanding family to think about and so feel the need for more rooms in their property.

If the drive for more space is a borrower’s main concern, then selling up and moving to a larger property is the obvious first step. But the speed and the scale of the house price rises we’ve seen of late have meant moving may simply not be an option at all. After all, the economic turmoil of the last year may mean those borrowers are already having to make their money go further.

But these borrowers do still have an excellent option worth considering. Rather than move to a new home, they may instead look to improve what they already have, adapting their existing property perhaps with an extension or a loft conversion to create more rooms.

A second could be first choice

Raising the funds for that home improvement work is not always straightforward though. Chances are the homeowner does not have the money in savings, so they need to borrow. And the thought of touching their outstanding mortgage may not be too appealing either.

For example, they may already be on a long-term fixed rate. By remortgaging now to raise the money for the home improvements, they will be incurring the early repayment charges which could easily run into the thousands of pounds.

On top of that, by borrowing more, they may be moving into a higher LTV band, sacrificing the low interest rate their adviser secured for them in the first place. Remortgaging for more money then brings with it a host of potential financial penalties, from having to pay a large exit fee to moving onto a more costly interest rate, meaning the monthly repayments jump even more significantly.

Second-charge mortgages are an excellent alternative for borrowers in this position though. As the loan is secured against the equity held in the property, then the original mortgage does not need to be touched at all.

At Evolution Money, we publish regular data on what our customers are using their second charge loans for, split between prime borrowers and those who are borrowing for debt consolidation purposes.

And it’s striking just how many prime borrowers are using that money to carry out some form of home improvement. Indeed, in our most recent tracker, more than half of our prime borrowers were using at least some of the money raised to pay for work on their property.

This trend is only likely to continue, as borrowers look to make the most of what they already have rather than battle against the tide of ongoing house price increases.

As a result, it’s really important advisers get comfortable with the second-charge market, or else partner with specialist master brokers and lenders who can take on that advice process. It’s not just best practice, ensuring the client receives the guidance they need, but it also boosts the chances of them returning to you in future for any additional mortgage needs.