The boom in sales of second charge mortgages has been well documented in recent months, as the rising interest rate environment and increased cost of borrowing has made the prospect of remortgaging an unattractive proposition for homeowners with a preferential rate on their first charge mortgage.
Instead, brokers with borrowers looking to raise capital without remortgaging, have started to acknowledge the benefits offered by the second charge market as a means to tap into the equity in their home without losing the attractive rate on their first charge mortgage or pay an early repayment charge.
Norton Home Loans has seen a substantial increase in demand for second charge mortgages over the last few months, and figures from the Finance & Leasing Association support this, with the sector reporting a 29% increase in new business volumes for the month of September alone.
This growth in business has been driven by a number of factors including the rising interest rate environment, a reduction in the number of fixed rate products available, and the reluctance of borrowers to sacrifice the low interest rate on their first charge mortgage.
While market conditions are perhaps a tad more volatile than many of us would like, the upside of this is that the second charge market’s star is finally rising as more brokers start to acknowledge the product as a viable financial planning tool for those clients needing a cash injection.
One of the main challenges facing the sector over the years has been the misconceptions associated with taking out a second charge loan. These have included claims that second charges are only for customers with adverse credit, that they are too expensive or that they are only used for debt consolidation.
While taking out a second charge mortgage can indeed help those with adverse credit repair their credit score and make them more attractive to future lenders, the reasons for taking out a second charge mortgage vary hugely, and the recent uptick in business volumes shows there is now a very broad mix of needs among borrowers.
Homeowners are now taking out a second charge loan for a number of reasons, including to renovate or extend their existing home, for business purposes, to pay a tax bill, to finance a medical procedure or to buy a holiday home, and it is not just those with an adverse credit record that can apply.
Norton considers all applicants with a minimum income of £20,000 per year, as well as those with adverse credit records such as CCJs or defaults, and missed mortgage payments. We also consider those who have been self-employed for one year or more.
A variety of income streams are also considered including lodger income, special guardianship income and those on Universal Credit as well as applicants in the probationary period of a new job which can be supported by a letter from the employer confirming employment and salary details.
Loan sizes for second charge mortgages can also vary according to the loan-to-value of the property a person is borrowing against, and range from £3,000 to £250,000 with terms of up to 25 years. This makes them suitable for a range of different needs.
Understanding the variables and the workings of the second charge market is vital in the current climate as there may be circumstances where a second charge is a more suitable option for your client than remortgaging.
However, we understand that some brokers may still be unfamiliar with the market or have reasons for being unable to process a loan, so working with a specialist lender that understands the market will not only help you gain insight into this fast-growing sector, it will also ensure your client gets the advice they need and the solution best suited to their needs.
David Binney is head of sales at Norton Home Loans
