We know from our conversations with mortgage brokers that the cost of living situation is already having an impact on their clients. The difficulties of the last few years, combined with rising everyday costs, mean that some borrowers are faced with a handful of unsecured debts which are proving punitive. This is because borrowers are struggling to make ends meet as a result of reduced income.
Consequently, there’s an appetite to consolidate those debts into a more manageable monthly payment, with borrowers looking to the use the considerable equity within their home, built up from house price growth we have seen since the pandemic.
If the timing is right, then remortgaging can be a useful option for those looking to consolidate their debts. However, if the client is on a preferential rate, or tied into a fixed rate, then this prospect can be far from appealing; not only would they be sacrificing their current low rate for an inevitably more costly deal today, they would also have to hand over a significant early redemption fee.
As an alternative, a second charge mortgage is a viable solution, leaving the existing first charge mortgage in place while enabling the borrower to capital raise the funds they require.
We are already seeing an increased appetite for second charge mortgages for precisely this purpose at the moment, alongside capital raising for large scale home improvements, school fees and property investment.
In fact, the latest data from the Finance & Leasing Association shows that second charge agreements jumped by 43% year on year in May, while growth in the number of deals taken out in the year to May reached 63%.
That’s a clear message that this is a growing sector, and as such presents a real opportunity for mortgage intermediaries.
Out of my wheelhouse
Since 2016, intermediaries have been required to include second charge mortgages when considering the best customer outcome for their clients who are looking to capital raise. However, the way in which they have gone about this will have varied significantly.
Some brokers view second charge as another string to their bow, and have attempted to build the knowledge – and the relationships – necessary to deal with these cases directly.
There’s no escaping the fact that this is a big ask however, and involves a huge amount of additional work for what may only be a handful of actual cases each year.
Instead, many brokers feel more comfortable partnering with specialist distributors in the second charge market. That way they can leverage the relationships the distributors enjoy with second charge lenders, tapping into their own expertise to ensure that the client benefits from a fast and smooth experience.
Taking that first step
However, at what point should you hand the client over to those specialist partners? It’s a question many intermediaries ask, and with good reason. Obviously all intermediaries want their clients to find the funds they need as swiftly and efficiently as possible, but there are longer-term considerations to bear in mind as well.
After all, you want to retain that client for the long-term. Brokers put a lot of work into building relationships with their clients, establishing that they can help those borrowers with a range of additional financial needs, doing far more than simply identifying a cheap mortgage rate.
That’s why it can be a really good idea for intermediaries to do an initial criteria source. This provides the broker with the details of the lenders that can support the criteria element that might be proving difficult. It also ensures that the borrower’s expectations are managed, as they can then look to source those lenders identified (where the rate is relative to the risk) as opposed to recommending a lender and a rate only to find later down the line that the lender cannot lend on the particular criteria.
Protecting ancillary sales
Those closed off to identifying and recommending second charge mortgages potentially put their ancillary sales at risk. Ultimately the borrower still has a capital-raising need and will continue on that search – potentially into the hands of someone that offers first and second charge mortgages – and will recommend a second charge mortgage where it is the best customer outcome, alongside reviewing their protection requirements as their financial commitments have changed.
Given the economic difficulties ahead, it’s very likely that brokers will see increased demand from their clients looking to capital raise for home improvements, debt consolidation or a combination of the two.
As a result, it’s crucial for brokers to build their knowledge of the specialist market to provide comfort to their clients that there are solutions in the short-term to achieve their aspirations. A broker able to spot the opportunity is providing the best service to their client, whether they then decide to own or refer is a commercial decision but doing nothing at all is not an option.
Maeve Ward is director of commercial operations at Central Trust