Second charges are growing but it’s important to do it right – Pepper Money

There are many reasons why more customers are choosing to take a second charge mortgage. The trend towards product transfers has been confirmed by UK Finance data, which revealed that 88% of mortgage renewals in Q2 2023 opted for a product transfer, up from 77% during the same period in 2022.

Product transfers may be perceived as easy, but they offer a like-for-like swap without the chance to raise additional capital, and over the course of their mortgage deal, many borrowers develop requirements to raise additional capital.

It may be for home improvements or to pay for a major life event and, in the current environment, there’s a particular demand for debt consolidation.

Recent statistics from The Money Charity underline the reasons behind this demand, showing a 9% surge in total outstanding credit balances in the UK by December 2023.

A survey conducted by Debt Justice during Debt Awareness Week found a record 6.7 million Britons grappling with financial difficulties, with 13% admitting to missing three or more credit or bill payments in the past six months.

There is clearly demand from customers who might want to restructure their finances and consolidate debts to ease monthly payments, and the rise in product transfers is limiting options for many mortgage holders seeking to remortgage, historically a popular route for debt consolidation.

Second charge can help customers tackle ‘unsecured debt’

Enter the second charge mortgage, which offers brokers a chance to assist customers in tackling unsecured debt. In some cases, consolidating debts this way could pave the way for a smoother remortgage application in the future.

While debt consolidation isn’t a one-size-fits-all solution, it can serve as a prudent financial planning tool. By consolidating debts into a single monthly payment via a second charge mortgage, borrowers can potentially lower their monthly outgoings and minimise the risk of missed payments, given that they only have one payment to manage rather than several.

Used correctly, debt consolidation can also lead to long-term financial freedom, with balances gradually diminishing over time. However, it’s crucial to thoroughly assess each customer’s circumstances and objectives and discuss the implications of debt consolidation transparently.

Brokers have ‘pivotal role’ in ‘debt consolidation’

Brokers play a pivotal role in guiding customers through the complexities of debt consolidation. It can prove to be a vital lifeline for many, but there are many considerations.

For example, the implications of converting unsecured balances to secured debt and considering whether a lower monthly outgoing could end up being more expensive in the longer term when accounting for fees and interest over an extended period of many years.

This is why, at Pepper Money, we think it’s important that brokers working with second charge mortgages are fully immersed in the market, so that they are best placed to understand the available options in a rapidly evolving market and things to consider.

With this in mind, we work with a limited number of select partners, to help ensure the best outcomes and highest levels of service for customers.