In the current environment of volatility and turmoil, it is unsurprising that second charges are on the rise.
Figures from the Finance & Leasing Association (FLA) show that second charge new business grew by 45% in the year to August 2022, while the number of new agreements in that month alone were a 37% increase year on year, worth £135m.
This market is going strong, which may have a lot to do with the varied uses and versatility of the product.
Where a product lies outside a broker’s scope, they could commit to making it known to consumers that the product is available
In more stable times, we might expect to see second charges being used as a way to unlock capital to fund new projects or purchases; making hay while the sun shines, so to speak. Right now, client trends focus heavily on streamlining finances and consolidating debts. Indeed, the FLA figures found 54% of August’s new agreements were centred on debt consolidation.
The continued growth of the second charge market is proof of the importance of these loans during difficult periods. With average interest rates on credit cards reaching 22%, according to the Bank of England, and everyday costs rising, it is more important than ever for borrowers to take control of their expenses.
While a second charge may not be the best solution for every situation, it will be for some
We’ve been able to help clients dramatically reduce their monthly outgoings. For example, a client was spending £1,200 per month servicing credit cards with no defined end date. We were able to raise the funds by way of a second charge mortgage, which enabled them to settle the debt and reduce the monthly outgoing to £300, which then offered a structured repayment plan.
It is important for brokers to take a proactive approach with clients who may not be aware that a second could be the right move.
First charge mortgage rates have been on a steep upward trajectory as the UK and global economies face uncertainty. Some may argue this is starting to level off, with major lenders bringing rates back down in the wake of Rishi Sunak’s arrival at Number 10.
However, this could just be a correction following the spikes that resulted during the events of Liz Truss’s final weeks as prime minister. Indeed, with the recent revolving door at Downing Street, it may be advisable to wait a bit before letting out a sigh of relief at our new-found stability.
A struggling client may not realise that help is out there
So, with rates looking set to at least remain high, if not rise further, even homeowners with a few years left on their fixed rate should be thinking about how a higher monthly payment might affect their monthly outgoings. Brokers need to check in with their clients to assess whether a second charge might help fortify their finances.
At the very least, a proactive broker will be able to help those clients remain steady, building a positive relationship as an added bonus. In an even more meaningful way, this conversation may uncover a struggling client who is unaware that help is out there.
Supply and demand
Second charges are an integral part of the fabric of support that will be fundamental to moving through these economic difficulties. However, this market is faced with its own issues, which brokers need to understand before offering this solution to their clients.
Economic uncertainty has led many lenders to pull products and take an increasingly careful approach to lending. The second charge market is no different; lenders continue to either increase rates or pull them altogether, reducing the availability of products.
We’ve been able to help clients dramatically reduce their monthly outgoings
For all of these reasons, demand will stay strong, which means whichever lender is offering the most appealing rate risks being flooded with applications even as products and pricing keep changing.
In a market with this many moving parts, combined with an environment of economic uncertainty, it is more important than ever to work with experts. As a specialist distributor, it is Brightstar’s job to keep our finger on the pulse and understand where the best deals are, even when that information changes on a daily basis.
While a second charge may not be the best solution for every situation, it will be for some. And, with the approaching Consumer Duty deadlines looming, this means greater emphasis on brokers disclosing limitations in their scope of service and the range of options; or clearly signposting clients to someone who is authorised and able to advise on the best solution.
This market is going strong, which may have a lot to do with the varied uses and versatility of the product
At Brightstar, we understand that not all brokers will be able to advise on all options. But, where a product lies outside a broker’s scope and they cannot offer advice themselves, we think they could commit to making it known to consumers that the product is available, that they are unable to offer it, and that it may provide a more suitable solution for their circumstances.
Stewart Simpson is a second charge mortgage specialist at Brightstar Financial