In a rising interest rate environment, the appeal of second charge mortgages comes into its own as a growing number of borrowers looking to raise funds to consolidate debt, carry out home renovations or better manage their finances due to the cost-of-living crisis, seek alternative options to remortgaging.
Faced with the prospect of losing the preferential rate on their first charge mortgage or being forced to pay penalties such as early repayment charges, a growing number of borrowers and brokers are starting to acknowledge the benefits offered by the second charge market as a means to tap into the equity in their homes in order to capital raise.
Recently, the second charge sector has been experiencing a much-lauded surge in growth and figures from the Finance & Leasing Association (FLA) has shown this upward trajectory looks set to continue, with new business volumes growing by 29% in September 2022 and accounting for £145m in value.
This uptick in borrowers taking out a second charge comes as no surprise in the current economic climate, as it enables those borrowers on a five-year fix with a rate of 1.5% for example, to keep the low rate on their existing mortgage and avoid paying any early repayment charges by exiting before the end of the term.
This is particularly attractive given the fact that the Bank of England base rate is currently sitting at a 14-year high of 3%, and forecast to reach 5% in 2023, meaning the days of securing a historically low interest rate on a first charge mortgage are a thing of the past.
For a number of brokers and their clients, this is starting to hit home and many are now beginning to acknowledge second charge mortgages as an important financial planning tool for raising additional capital, particularly for consolidating debt and conducting home renovations.
According to the figures from the FLA, 57% of new loan agreements in September were for the consolidation of existing loans, which clearly demonstrates the growing demand among borrowers to consolidate debt and better manage their finances as the UK economy heads into a recession and the cost-of-living crisis continues to tighten its grip on household budgets.
In addition, a further 22% of agreements were for both loan consolidation and home improvements combined, while 15% were solely for home improvements, the latter of which looks set to increase even further over the course of the next 12 months as the highly anticipated slowdown in the housing market drives more homeowners to tap into the equity in their homes and improve rather than move to create more space.
In situations like this, a second charge may prove to be a more suitable and cost-effective option for your client, and prove to be the best advice, particularly if the borrower moves on to a product transfer but does not want to take out a further advance, as they can release equity with a second charge and spread the cost over a period of up to 25 years.
Of course, despite the growth in the sector, second charge mortgages may still be unfamiliar territory for many brokers, but that does not mean they are not worth exploring. In fact, in a higher interest rate environment like the one we are currently experiencing, the need to explore all options has never been greater.
For those brokers entering unchartered waters, referring your client to a specialist packager like Norton Broker Services means we can take away the stress and do the work for you. We have decades’ worth of experience in this field and will work closely with you and your client, so you can rest assured that they get the best and most suitable solution for their needs.
Jimmy Allen is broker account manager at Norton Broker Services
