Ryan McGrath, second charge sales director at Pepper Money, said second charge mortgages had become a solution for borrowers looking to avoid refinancing low-rate first change mortgages.
McGrath said a combination of cost-of-living pressures, growing consumer awareness and increasing competition among lenders was driving the demand for second charges.
Protecting low-rate first charges
He said: “The vast majority of the customers that we help are looking to consolidate debts.
“By consolidating debt, customers can often achieve a lower interest rate, which means their monthly outgoings are lower. We’re reducing customers’ outgoings on average by about £600-700 a month.”
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He said many borrowers were also choosing second charge loans to preserve historically low rates on their existing mortgages.
He added: “You’ve got customers that are on particularly good interest rates on their first charge mortgage and they don’t want to disturb them. A second charge is a good alternative to a remortgage where the customer might incur an ERC or have to refinance their whole secured debt onto a much higher rate.”
According to McGrath, debt consolidation remains the dominant reason for taking out a second charge loan, accounting for roughly 80-85% of cases.
While higher mortgage rates have made some borrowers ineligible for second charge lending due to affordability stress testing, McGrath said lenders were right to remain cautious.
“We’re always very cautious about making sure the customer can afford the loan, not just today, but also into the future,” he said.
Despite this, he expects the market to continue expanding.
“I think we’ll see a greater number of customers looking to secured loans to reduce their outgoings, so our assumption is growth will continue for sure,” he said.
Innovation in the market
McGrath added that new entrants and greater competition had encouraged innovation across the sector, significantly improving application and completion times.
He said: “When I joined Pepper three-and-a-half to four years ago, it used to take us something like 16 days to complete on a secured loan on average. Now, it’s under 10 days.
“A lot of lenders’ propositions are now paperless, most customers can e-sign, and most loans are completed using an automated valuation rather than a physical valuation.”
Looking ahead, McGrath expects further competition to drive innovation and new product development across the market.
He continued: “We know there are other new entrants coming into the market next year. That will continue to drive competition, which can only be a good thing.
“The players in the market are competitive, and I think brokers will enjoy that.”
