SLS In Focus – Second charge interest will continue to grow over next three to four years

Before the festive break, brokers said that they expected second charge to be big business in 2023, pointing to the rising cost of living, higher remortgage costs and more people’s deals expiring.

The latest figures from the Finance and Leasing Association show that the value of second charge business in the 12 months to November increased 45 per cent year on year to around £1.6bn.

The number of new agreements also rose by over a third year on year to 33,840 in the 12 months to November.

The report said that over half of the new agreements were for consolidating existing loans and 13 per cent was for home improvements. Around 23 per cent was for both loan consolidation and home improvements.

Second charge charging ahead

Gary Boakes, director at Verve Financial, said it was not yet mid-January and the company had already “seen more interest in second charges than the whole of 2022”.

He continued: “With the cost of living increasing, people will be looking to refinance and debt consolidate this year to reduce outgoings. With lender criteria varying massively about paying off debt then second charges are going to an invaluable option for customers who don’t fit mainstream lending criteria.

“The interest rates are inevitably going to be higher, but if it reduces your monthly outgoings and reduces your worries then this is only going to be positive for your financial wellbeing.”

Samuel Mather-Holgate, independent financial advisor at Mather and Murray Financial, said that secured loans could be “really useful” for clients who have secured a variable fixed interest mortgage on their property with plenty of equity but have a “specific need for capital expenditure and don’t want to refinance their whole loan at a higher rate”.

He said: “These are the types of lending enquiries we are seeing much more of as the base rate has increased so much in 2022. I also expect that 2023 will see more debt refinancing onto secured loans, where high street lenders have refused on criteria, policy or credit grounds.”

Second charges good for those on ‘long-term low mortgage rates’

Justin Moy, managing director at EHF Mortgages, noted that second charge borrowing could work well for those on long-term low mortgage rates.

He continued that he expected the popularity of second charges to grow in the next three or four years.

Moy added: “You can keep that low rate on the bulk of your mortgage, and only the new borrowing is on a higher interest rate, so the overall interest cost is still very attractive. Many will look to consolidate more expensive finance, such as credit cards that are typically over 20 per cent per annum, as well as home improvements.

“Second charge loan rates are normally two or three per cent more than a traditional mortgage and are not designed to run their full term necessarily. But they offer a way to avoid penalties and protect excellent mortgage rates in the short term. When that original deal expires, you can look to remortgage the whole amount at that time.”

Second charge popularity ‘limited’ if distribution ‘remains restricted’

Jonathan Burridge, founding adviser at We Are Money, said that the popularity of second charges with mortgage advisers would “remain limited for as long as distribution remains restricted”.

He noted: “The process of bringing about a second charge is no more complex than a first, it is just different, and it is within the capability of most regulated advisers to complete if there was training and access available.”

Burridge said that master brokers and packagers typically charge fees of £995 or more, with maximums generally capped at £5,000, along with lender fees of up to two per cent and higher pricing “to reflect the greater risk”.

He explained that this together meant it “quickly looks expensive when comparing to a further advance or remortgage”.

“There is a place for second charge lending but it needs to be pulled into the mainstream intermediary market to make it fairer for the borrower,” Burridge concluded.