Second charge mortgages have become a natural next step for many clients looking to capital raise over the last few years, as increased affordability challenges and rising interest rates have made remortgaging less attractive for many borrowers.
With market dynamics and inflationary pressure continuing to drive up living costs, the appeal of second charge mortgages is likely to continue, particularly for those homeowners seeking the flexibility and affordability offered by taking out a second charge mortgage.
One of the many benefits of a second charge mortgage is that borrowers can retain the preferential rate on their first charge loan by tapping into the equity in their home using a second charge. Borrowers can also avoid penalties such as early repayment charges because they have exited their current mortgage before the end of the term.
This is particularly attractive to those borrowers looking to capital raise in the current economic climate, especially if they still have a few years left to run on their five or 10-year low fixed rate deal.
For example, according to figures from Moneyfacts, the average two-year fixed rate deal is currently sitting at 6.43%, while five-year fixes are hovering around the 5.97% mark. This makes them significantly higher than the 1.5% to 2% rates locked in by those who took out a five-year fix at the start of the pandemic, so retaining the lower rate on their first charge mortgage will be a priority.
The flexibility of a second charge mortgage also makes them an appealing proposition to those borrowers looking to capital raise as the money borrowed can be used for any legal purpose.
While the majority (59%) of all new agreements taken out in August were for debt consolidation purposes, according to the Finance & Leasing Association, the money raised from a second charge can be used in multiple ways, including to finance home improvements, cover the cost of a wedding or even pay a tax bill.
More recently, second charges have also proven to be a useful capital raising tool for those clients coming off their fixed rate deals and onto a product transfer because they are no longer eligible for further borrowing with their current lender due to affordability constraints.
It is here that a second charge mortgage can help by enabling the client to raise the financing they need as long as they are able to meet the repayments required to finance the loan.
As a general rule, second charge mortgage affordability is calculated by assessing the client’s existing financial commitments and adding the sum of the second charge mortgage repayments, including interest, to the affordability assessment. In order to qualify, clients will need to prove to the lender that they can make the monthly repayments.
Other charges such as administration costs are also sometimes added to the overall payment, but as property valuations are often carried out electronically, there will rarely be any conveyancing or solicitor fees required.
For many homeowners in need of extra funds, remortgaging is often the first port of call, but there are many situations where this may not the best outcome for their needs. Therefore, it is essential that brokers with clients looking to capital raise consider all the options available in the market, especially a second charge mortgage, as this could provide your client with a more flexible and affordable solution to their capital raising requirements.
Jimmy Allen is broker account manager at Norton Broker Services
