Unleashing the potential of the second charge market

The second charge mortgage market’s star looks set to continue shining in 2024, with demand for the product expected to increase and a number of new lenders are expected to enter the market over the course of the next 12 months.

New market entrants are always a welcome addition for borrowers, as they bring more product offerings and increased competition to the market. This is also good news for the entire mortgage industry, as a larger number of players can help to increase awareness of the second charge mortgage market and the wider specialist lending sector as a whole.

Following 18 months of uncertainty and turbulence in the economy, sales of second charge mortgages have increased as borrowers, faced with a squeeze on household budgets and affordability, sought an alternative to remortgaging to address their capital raising needs.

Recent figures from the Finance & Leasing Association (FLA) suggests this trend looks set to continue as the year progresses, with new business volumes in the second charge market up 17% in February, as confidence once again returned to the market.

Yet despite the strong start to the year, the second charge mortgage sector remains one of the largest areas of untapped potential in the mortgage market. While there are certainly more brokers starting to dip a toe in the sector, there are still many others that continue to shy away from advising clients on this type of product.

However, in the current economic climate where product transfers continue to dominate, a second charge mortgage could provide homeowners with an alternative option for releasing capital from their homes, while also enabling brokers to tap into a new and lucrative area of the specialist finance market.

The recent FLA figures show that 60% of loans taken out in February were used for debt consolidation purposes, with 13% used to carry out home improvements, and a further 23% earmarked for a combination of both.

Given the financial challenges facing many borrowers at the moment, taking out a second charge loan to consolidate debt for example, can prove a useful financial tool as it can reduce multiple debts into one single monthly payment, making servicing the debt more manageable for the client.

Similarly, using a second charge to finance an extension by tapping into existing equity in the home for example, could prove more financially astute than moving home entirely. Not only will extending the home save the client thousands of pounds on stamp duty and the associated costs of moving, they will also be able to build a house that better suits their needs. 

While home renovations and debt consolidation are the most common reasons why many borrowers take out a second charge loan, they can in fact be used for a number of capital raising purposes such as paying a tax bill, covering the cost of school fees or even to pay for a divorce.

They can also prove to be a useful tool for those purchasers looking to move quickly, such as buy-to-let landlords or would-be property investors looking to expand a portfolio, as the funds can be released quicker than a standard mortgage and therefore give them the purchasing edge over rival investors. 

Obviously, there will be cases when a second charge mortgage is not the best outcome for the client, but in situations where remortgaging means the client may be at risk of losing the preferential rate on their first charge mortgage, a second charge may prove to be a better option than moving onto a more expensive deal.

Rates on second charge mortgages have become increasingly competitive in recent months and with new entrants expected to enter the market later this year, the increased competition could help to drive down rates even further.

Before advising a client to take out a second charge mortgage, weighing up the pros and cons against the needs of each client is vital. For brokers unfamiliar with the nuances of the second charge market, referring the client to a specialist distributor such as Norton Broker Services will ensure they get the advice and guidance needed to satisfy their capital raising requirements.