Rising interest rates could increase appeal of second charges – analysis

Mark Dyason, owner of Edinburgh Mortgage Advice, said that the rise in popularity of long-term fixed rates, along with customers looking to manage their finances due to the rising cost of living, has led more people to consider second charges.

“Lenders whose further advance products, criteria, or processes are not working for clients have also meant that more are coming back asking how other lenders can help them,” he said.

He identified debt consolidation and home improvements as the main use of the funding, but this varies – one enquiry of note was from a musician looking to purchase a cello.

Dyason said that there are sufficient lenders in the space, but if the sector continues to grow then first charge lenders are “bound to look at this market with its margins and lending opportunity as somewhere to deliver growth.”

Second charge lending reached £155m in March, according to Loans Warehouse, setting a new post-credit crunch record. The report mentions that the majority of loans taken out in February were for debt consolidation.

Finance and Leasing Association figures also show that second charge new business volumes were up 59 per cent in February.

Scott Taylor-Barr, financial adviser at Carl Summers Financial Services, said that second charges are a “vitally important tool in the broker’s toolkit.”

He added that remortgages or further advances are normally the go-to options as they tend to be the “lowest cost options” for the client.

However, he notes that clients tied in to their current mortgage and lender won’t normally agree to additional borrowing when a second charge could be the “best way to meet the client’s needs”.

According to Criteria Brain, 54 per cent of listed residential lenders will potentially accept an application where there is a simultaneous completion of a second charge. This is equivalent to around 37 lenders.

Taylor-Barr added: “With rising interest rates now a factor, it may also be that the clients’ existing mortgage deal is so good compared to the rates now available that a full remortgage becomes unattractive.

“In this case, keeping the existing deal and taking the extra money on a second charge, despite the higher rate and fees, actually works out more cost-effective overall in situations where taking the extra borrowing from the current first charge lender isn’t possible.”

Use a packager and be aware of high fees

Dyason recommends that clients and introducers talk to experts in the second charge sector so that cases can be “packaged quickly and found in a timely way”.

He added: “Seconds are close to firsts but have enough differences to mean that using a packager will smooth the path for both broker and client.”

Taylor-Barr said seconds would generally be at a higher rate than a standard mortgage, with higher set-up fees too.

Lewis Shaw, founder at Shaw Financial Services, said that second charges were a “growing area” that could be used to fund home improvements or debt consolidation.

“However, caveat emptor (let the buyer beware), second charges come with big fees, higher rates, and not all lenders are happy about them. If they can be avoided they should be. If it’s a necessity then ensure you take professional advice before signing on the dotted line,” he said.