Reasons to use a second charge: Helping underserved borrowers access mortgages

Second charge mortgages are an extremely versatile capital raising solution for borrowers looking to gain access to funding by tapping into the equity in their home.

They work by allowing homeowners to take out a second mortgage on an existing property, which can then be used for a number of purposes like paying off debt or home renovations.

One of the many benefits of a second charge mortgage is that they allow homeowners to borrow additional funds against their home in situations where access to funding may not be otherwise available through remortgaging or other capital raising tools.

This can be an ideal solution in cases where a borrower is unable to remortgage because they have failed to meet the affordability requirements set by the mortgage lender.

It can also be useful in situations where the borrower still has some time to run on their first charge mortgage and would like to retain the preferential rate on their first charge loan.

Increased demand 

Demand for second charge mortgages has increased in the last few years as challenging economic conditions has prompted more borrowers to look for alternative capital raising solutions to remortgaging.

Driving this demand has been affordability challenges presented by higher interest rates, rising living costs and credit limitations, all of which have put the squeeze on disposable household income.

Figures from the Finance & Leasing Association (FLA) show new business volumes for second charge mortgages were up 17% in 2024; the highest annual growth since 2009. Sales for the month of December were also up 16% on the year before, as demand for second charge mortgages remained high.

Underserved borrowers and their challenges

One of the many reasons why a borrower may find themselves taking out a second charge mortgage is because they have been unable to secure financing through traditional means.

This could be due to a history of adverse credit such as a couple of missed credit card payments, large-scale credit defaults or even a County Court Judgement (CCJ).

These borrowers have historically been massively underserved by the mainstream mortgage market, with strict lending criteria and a preference for “vanilla” borrowers among mainstream banks often resulting in borrowers of this kind having nowhere to go.

More recently however, the challenges facing the UK economy over the last five years has seen a growing number of borrowers experiencing personal debt or financial pressure for the first time. 

This has led to an uptick in household debt levels across the UK with figures from PwC showing total household debt exceeded £2 trillion for the very first time in 2023, the equivalent of £71,000 per household.

As a result, more borrowers have found themselves falling outside the parameters of mainstream lending, which has led to heightened demand for specialist mortgage products like second charge mortgages to address their capital raising needs. 

Changing workplace dynamics

Changing social demographics including a shift in the way people work also means there are now more self-employed and gig economy workers than ever before. Many of these borrowers have previously struggled to raise capital due to the challenges of proving income for affordability purposes to mainstream lenders. 

Many of these lenders often require two or more years of consistent outcome for affordability purposes, which can prove difficult for self-employed, contract and gig economy workers, whose income levels can fluctuate significantly on a yearly basis. 

This has helped to fuel the growth of the second charge mortgage market as borrowers with irregular or complex income streams sought more flexible financing solutions to address their capital raising needs. 

Similarly, the personalised and flexible underwriting process used to assess second charge mortgage applications means they have also proven popular for commission-based borrowers or part-time earners who may have found themselves locked out of other forms of credit because they only work reduced or part-time hours due to age, ill health or family commitments. 

Reasons for using a second charge mortgage 

There are a number of reasons why taking out a second charge mortgage may be the right solution for clients seeking a capital raising solution. 

Perhaps they are looking to secure funds to consolidate outstanding debt into a single, more manageable payment, or want to carry out home renovations or build an extension instead of moving house. 

Or perhaps they have some major expenses to pay, such as a tax bill, school fees or need to finance a divorce. In each of these situations, a second charge mortgage can provide them with access to the funds they need and help to support their short-term cash-flow needs. 

Unlike remortgaging, a second charge mortgage will allow the borrower to access the equity in their home without losing the interest rate on their first charge mortgage. 

This can prove financially beneficial if the borrower wants to retain the low and preferential interest rate on their first charge mortgage, especially if they still have a couple of years left to go on their current deal.

In fact, this may be the preferred choice for those borrowers that took out a five-year fixed rate first charge mortgage in August 2022 for example, when the Bank of England base rate was sitting at 1.75%.

By taking out a second charge mortgage instead of remortgaging, the borrower can retain the lower rate and let their first charge mortgage run its natural course. This will help to save them money in the long run and often help to avoid them paying an early repayment charge for leaving the first charge mortgage early.

Key considerations for brokers

When advising clients on a second charge mortgage, it is important that brokers ensure they have explored every option available in order to address their clients’ capital raising options.

This includes ensuring that a second charge mortgage is the best outcome for their needs by conducting a thorough affordability assessment that takes into account current and future financial circumstances.

Disclosing all fees upfront, such as broker and lender fees and any other associated costs, is also crucial, as well as explaining the potential financial impact that any change to interest rates or repayment structures could mean.

As with any financial product, it is also important that brokers ensure their clients are aware of the risks associated with taking out a second charge mortgage, such as losing their home, should they fail to keep up with repayments.

Overcoming misconceptions

For those brokers with clients who may be unfamiliar with second charge mortgage products, they may need to address any misconceptions or pre-conceived ideas held by themselves or their clients around this type of lending.

This includes the fact that this type of business is difficult to place; is only used by high-net-worth clients, property investors, those with a bad credit history or is the sole domain of specialist lending brokers.

While second charge mortgages are indeed used by all these borrowers, in today’s Consumer Duty world, failing to consider a second charge mortgage when exploring capital raising solutions for any client is no longer an option. Therefore, it should at least be entertained in all possible situations where a borrower is looking to gain access to funds.

That is not to say it will be the best outcome for each and every client. Of course, there will be situations where a second charge mortgage is not the best solution for the client, but it should certainly be a consideration before it is ruled out to ensure FCA compliance protocols are adhered to.

Conclusion

Given the flexibility of raising capital using a second charge mortgage, it is little wonder that the product’s popularity is continuing to soar, particularly when it comes to helping borrowers consolidate debt and get back on track with their finances.

For those borrowers with financial complexities such as a poor credit rating, irregular income streams or unforeseen expenses, a second charge mortgage can provide them with the solution they need to address their capital raising needs. 

It can also help these borrowers avoid any early repayment penalties imposed by leaving their first charge mortgage early as well as protecting the preferential rate on their first charge loan.

For brokers unfamiliar with this area of the market, working with specialist lenders and brokers immersed in this area of the market can help them to navigate any issues they may encounter when navigating second charge mortgages for the first time.

By integrating second charge lending into their client’s capital raising recommendations, these brokers will also open up more opportunities for business growth while continuing to ensure they meet the needs of their clients and the ongoing demands of the regulator.