Second charge offers options to those with cost of living troubles

By James Rainbird

June 27, 2022

Over recent years, we have seen a lot of aspirational borrowing. With interest rates so low, borrowing had never looked so attractive. The easy availability of cheap personal loans and 0% credit cards made it far more straightforward for people to go for that expensive new car, that all-inclusive holiday, or some other purchase.

And dealing with the cost of those debts has been relatively comfortable for many. Up until now.

“Given the ever-growing rate of inflation – the truth is that remortgaging in this market may well mean moving to a far less attractive rate.”

Things may well have changed though. The cost of living crisis means many people have less disposable income to devote to paying off those personal loans and credit cards. They might have had £200 a month which they could use in to pay these debts previously, but today a payment of that size might not really be possible. What’s more, there may simply no longer be suitable 0% balance transfer credit cards to shift their debt onto as they have done in the past.

As a result, these borrowers will likely be keen to find ways to consolidate those debts into something more manageable. Mortgage advisers may well be their first port of call on this front, and so are perfectly positioned to help borrowers identify ways to bring those various unsecured debts together into a single loan.

Tapping into property equity

For borrowers in this position, it makes a lot of sense to tap into the equity they have built up in their properties.

This is all the more compelling an option after the last few years of somewhat extraordinary property price growth – the latest house price index from the Land Registry shows over the 12 months to March 2022 the value of the average home has jumped by just under 10%.

If the client is approaching the end of a fixed-rate mortgage term, then remortgaging for a larger sum may make sense. However, for those not in this position – perhaps they are two years into a five-year fix – remortgaging can be expensive. And potentially a mistake.

After all, doing so will not only incur potentially punitive exit fees, but also means sacrificing the existing rate. That may have been a bearable notion a year ago, but after a succession of base rate increases – with the likelihood of more on the way, given the ever-growing rate of inflation – the truth is that remortgaging in this market may well mean moving to a far less attractive rate.

That’s why second charge mortgages are such a compelling option for those looking to consolidate their debts using their property. The mortgage is secured against the equity held in the property, meaning the original mortgage is left completely untouched. In most instances there are no early repayment charges, no risk of moving to a higher LTV or interest rate.

Instead that ever growing equity stake is put to use, offering clients a simple way to bring their unsecured debts together into a single, more affordable payment.

Navigating the market

As with other areas of the property finance market, rates on second charge deals have been heading up of late. However, it’s important to stress that the level of competition and innovation in the seconds market today means the rates on offer are much more attractive than in years gone by.

Nonetheless, it takes expertise to navigate this challenging environment. It’s not just rates, but criteria too. Some high-street lenders are still quite prescriptive when it comes to what they will accept when a client is consolidating debt, which can in some cases mean a debt is effectively counted twice.

However, the specialist lenders in this market that we deal with take a more flexible approach, meaning they are able to help far more potential borrowers.

While some advisers are comfortable handling second charge mortgages for their clients themselves, others may only deal with the occasional case and so may feel somewhat removed from the sector.

For these advisers, it makes a lot of sense to work closely with an experienced packager. Quality distributors like ourselves have long-standing relationships with the top lenders in the sector, and the sort of expertise that means we can not only identify the right lender and product for the client, but move swiftly in order to secure the deal before rates move any further.