Tapping into the potential of second charge mortgages – Peagam

This trend is continuing in the current economic climate, where relinquishing the preferential rate on a first charge mortgage or paying a hefty early repayment charge (ERC) in order to exit a current deal may not make financial sense for the majority of mortgage borrowers looking to release equity. 

Tougher market conditions and tighter lending criteria also mean many mainstream first charge lenders are likely to be reluctant to allow homeowners to borrow more money against their property due to affordability concerns, meaning these borrowers want alternative ways of raising extra funds.  

According to recent figures from the Finance and Leasing Association, £126m worth of new second charge mortgage lending business was written in July 2023, with the average advance sitting in the region of £46,759. This growth and demand in the second charge market is expected to continue over the next few years as the capital-raising needs of clients increase and awareness of the sector improves. 

While the majority of second charge mortgages are used for debt consolidation purposes or to finance home improvements and renovations such as an extension, or even a combination of both, these products can actually be used for a diverse range of purposes such as to pay for a wedding, buy a car or to even start a business.  

Real life solutions 

For example, The Right Loan recently dealt with a client who took out a second charge mortgage to pay off a £50,000 tax bill because the adviser was unable to find a mortgage lender willing to take on the risk. This enabled the client to pay off the debt using the funds from the second charge, which will then be repaid on a monthly basis alongside the client’s first charge mortgage.  

In addition to flexibility, another key advantage of a second charge mortgage is the speed with which financing can be released. This makes them particularly appealing to those borrowers looking to swiftly raise funds to meet a tight deadline as the money is available much quicker than with a typical remortgage.   

An example of this can be seen in a recent case which saw The Right Loan secure a seven-day completion on a secured loan worth £230,000 for a client looking to repay a bridging loan in order to avoid defaulting. In another, a second charge was taken out on a buy-to-let portfolio in order to secure a further property. With no valuation required, the whole process was completed and the funds were released within two weeks. 

A viable option 

With rates starting at 7.99 per cent and loans of up to £1m available on a maximum term of 35 years across both residential and buy-to-let products, second charge mortgages are also a competitively-priced solution for advisers with clients in need of extra funding, while the speed and flexibility of the product also makes them a useful financial solution for brokers to have in their toolkit.   

If you’re an adviser who doesn’t feel comfortable advising in this space, or doesn’t feel they have the necessary expertise or understanding of what is available and what is achievable, then you always have the opportunity to refer the case to a specialist in the sector, ensuring the client gets the advice they need and you receive the referral income without taking the responsibility.  

In the current economic climate, there will always be clients in need of some form of extra funding, whether to pay a tax bill, consolidate debt or to finance a new business. The second charge market presents advisers with a viable solution for these clients by offering swift access to flexible finance as well as the opportunity to tap into another source of potential revenue.