The rise of the second charge mortgage market has been very well documented over the last few years, with sales reaching historic highs as borrowers began to realise the benefits of the product as a capital raising tool.
Driven primarily by rising interest rates, soaring inflation and the cost-of-living crisis, the sector’s surge in popularity has seen borrowers seek out an alternative solution to remortgaging when faced with a squeeze on affordability.
With the UK economy now seemingly showing signs of greater stability, many people may be forgiven for thinking that sales of second charge loans will begin to fall as borrowers start to experience an easing of financial pressure.
However, this is unlikely to be the case, with demand for the product expected to continue to increase and a number of new lenders poised to enter the market over the course of the next 12 months.
In fact, figures from the Finance & Leasing Association (FL&A) show that the sector recorded its highest level of new business by value in May this year, the highest it has seen since October 2022.
Overall, there has been strong and sustained growth in the sector throughout 2024, with new business growth value increasing by 20% and new business volumes rising 14% in the first five months of the year.
While debt consolidation and home improvements have been the key drivers for much of this activity, brokers and borrowers are becoming increasingly aware of the fact that second charge loans can actually be used in any situation where capital raising is required.
For example, Norton Broker Services frequently receives applications from borrowers seeking to use a second charge loan for a range of purposes that many may consider to be outside of the “norm”.
These include the cost of paying for a pilot’s license, which can be in excess of £80,000; paying school fees; developing and financing equestrian facilities and buying horses. Other uses include lifestyle purchases such as investing in a holiday home by buying a caravan or motorhome or purchasing a boat or yacht for water-based hobbies or holidays.
In all of these situations, a second charge mortgage can provide swift access to a substantial amount of money that might not be available through remortgaging or other forms of credit like personal loans or credit cards.
This can prove highly beneficial in situations such as paying for high-cost items such as pilot training and equestrian facility improvements as these both require a significant initial financial outlay.
In each of these cases, taking out a second charge mortgage can help borrowers manage cash flow more effectively as instead of paying upfront for training and improvements, they can spread the cost over a longer period, making it easier to manage their finances.
Often, a second charge loan will also typically have lower interest rates compared to unsecured loans because they are secured against an asset owned by the borrower – their home. This can make them more affordable over the long term, especially if the loan is taken out for larger and more substantial expenses.
There are also additional benefits for taking out a second charge loan instead of remortgaging, such as enabling the borrower to retain the favourable terms of their existing mortgage. This can prove particularly advantageous in situations where the borrower may lose a low interest rate or incurring early repayment charges by remortgaging onto another deal.
Obviously, there will be cases when a second charge mortgage is not the best outcome for the client, but in situations where remortgaging is not a viable option, a second charge may prove to be the solution they need.
Weighing up the pros and cons of taking out the product is of course, crucial. Brokers unfamiliar with the second charge market should ensure they refer the client to a specialist distributor such as Norton Broker Services to get the advice they need. This will ensure their clients’ capital raising requirements are adequately met.
Jimmy Allen is broker account manager at Norton Broker Services
