The rise of second charge mortgages

The second charge mortgage market is continuing to experience a boom in popularity as market forces such as soaring inflation, rising interest rates and escalating living costs drive business volumes upwards as a growing number of brokers and their clients start to realise the benefits offered by the market.

Recent figures from the Finance & Leasing Association show new business volumes in the sector are up by 29% in July 2022, the highest monthly total for new business volumes since September 2008.

Of the total new agreements written in July, 54% were for the consolidation of existing loans, 15% for home improvements, and a further 26% were for both loan consolidation and home improvements.

The continued uptick in the growth of the sector is no surprise given the current volatility in the global economic markets, and with further interest rate hikes anticipated and inflation expected to creep up towards 14% by the end of the year, this trend looks set to continue as UK households look at ways to better manage their household budgets.

As the FLA figures show, debt consolidation is a key driver in the sector’s growth, accounting for over half of all business transactions, as more brokers and homeowners start to realise the potential of paying off the debt by borrowing against the equity in their home and taking out a second charge mortgage.

For homeowners who have benefited from the rapid rise in house prices over the last few years, taking out a second charge mortgage is a useful tool to consolidate debt as they may be able to borrow more than with other credit options, particularly if their house has significantly increased in value.

This money can then be used to pay off any outstanding credit card or unsecured debt they currently hold and get them back on an even keel. It also means that homeowners are able to keep their first charge mortgage in place, which safeguards the preferential rate on their first charge mortgage and avoids incurring any early repayment charges.

Using a second charge mortgage to carry out home renovations can also be a handy solution for homeowners looking to create more space, as it is easier and cheaper than moving. This is particularly relevant in the current climate as predictions of a slowdown in the housing market could lead to fewer people putting their homes up for sale and deciding to extend instead.

In a higher interest rate environment, this makes more sense as borrowers on a decent fixed rate but needing to capital raise can tap into the equity of their home and use the money to build an extension, garden office or loft conversion. This will allow them to create more space in their home while keeping their first charge mortgage intact.

Brokers with clients in need of a cash injection but unwilling to lose the preferential rate on their first charge mortgage, should always consider a second charge mortgage as the best option for their client as they offer a cost-effective way to raise finance for debt consolidation or home improvements in situations where remortgaging isn’t feasible or the best advice for their circumstances.

This is particularly pertinent following the recent mini budget which has seen market fluctuation drive interest rates on remortgage products skywards. In this case, a second charge mortgage could well be a better option for your client.

For those brokers unfamiliar with the market or in a position where they cannot process the loan, referring the client to a specialist packager who can conduct the transaction on your behalf enables your client to get the deal best suited to their needs while you get on with the job at hand.