"Many people have had to turn to various types of credit in order to keep their heads above water, and so have found themselves leaving lockdown with more debt to their name than when they entered it."
There’s no question that second charge mortgages have an integral role to play when it comes to tackling debt. Even in normal times, there were significant numbers of borrowers across the country who had taken out a handful of different forms of credit, and so were juggling the difficulties that come from keeping on top of the various repayment dates, interest rates and outstanding balances.
Having the ability to bring those debts together into a single, simple-to-understand one-payment every month mortgage was understandably appealing.
And this cohort of borrowers has only grown over the last year and a half. The reality of the pandemic is that many people have had to turn to various types of credit in order to keep their heads above water, and so have found themselves leaving lockdown with more debt to their name than when they entered it. We have worked with many borrowers in this position already this year and expect to see more in the months to come.
However, it would be a mistake to think of second charge mortgages as being quite so limited in their appeal.
Don’t move, improve
Mortgage advisers won’t need me to remind them of just how frenzied the purchase market has been in 2021, as thousands of would-be buyers have battled to get their purchases over the line ahead of the stamp duty deadline. The allure of avoiding that tax bill led to huge workloads for everyone involved, and with it, significant jumps in average house prices.
However, not everyone wanted to get involved in that bun fight, opting to ignore the scrap for bigger or more suitable homes and instead focus their efforts - and their finances - on improving what they already have.
Our own second charge mortgage tracker has seen increasing numbers, particularly of prime borrowers, opting to use these loans for home improvements, whether that’s adding an extension, carrying out a loft conversion, or adapting an existing outside building into something more useful.
For some homeowners, sat on their lender’s standard variable rate, a remortgage is an option for raising the funds needed for that work. But how many adviser clients are sat on an SVR for any period of time? Not many.
Instead, advisers will have helped them to remortgage already, often to a lengthy fixed rate so that those borrowers can enjoy the benefits of a low interest rate for longer. As a result, remortgaging could come with a host of painful financial consequences. There’s the early repayment charge for moving to a new deal, which can be particularly high if the borrower is on a fixed rate product with some time left to run. There’s also the risk of not only losing out on the current low interest rate that they enjoy, but the potential of being moved up to a higher LTV band - and subsequent higher interest rate - on account of the increased level of borrowing.
Not exactly an attractive prospect, is it?
Helping more borrowers
However, second charge mortgages offer a way of raising that finance, without any of those financial knocks. The money is raised against the equity held in the property, leaving the first charge mortgage completely untouched. No ERCs to worry about, no danger of being shunted onto a higher rate; instead, the required finance is arranged swiftly and simply, leaving the homeowner to get on with improving their property to better meet their needs.
Given the number of people who are going to be working from home for at least part of the week for the foreseeable future, revamping your home so that you have a dedicated workspace rather than basing yourself at the kitchen table or on the sofa is an attractive idea, so it’s another area where we expect to see significant ongoing demand.
The official figures from the Finance & Leasing Association show that the number of second charge mortgages taken out, and the sums being borrowed, have been rising sharply over the last few months. That’s only likely to continue in the months ahead, so it’s up to lenders to be innovative in our product design and our processes, and demonstrate to brokers just how we can help their clients no matter why they might be a suitable prospect for a second charge product.
