In the current environment of volatility and turmoil, it is perhaps unsurprising that second charges – a great method of using existing assets to either shore up finances or unlock cash – are on the rise.
Figures from the Finance and 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 was a 37% increase year-on-year, worth £135 million.
This market is going strong, which might have a lot to do with the varied uses and versatility of the product. In more stable times, we might expect to see second charges being used as a way to unlock capital in order to fund new projects or purchases – making hay while the sun shines, so to speak.
Now, we are seeing client trends focus heavily on streamlining finances and consolidating debts, which is to be expected given rising interest rates and the steep cost of living. Indeed, the FLA figures found that 54% of August’s new agreements were centered 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 outgoings.
By reducing several forms of credit into one monthly payment, secured on a property and spread out over a longer term, homeowners can gain access to more favourable rates, as well as make their finances easier to track and manage.
Thinking ahead
It is important for brokers to take a proactive approach with those clients who may not realise that a second could be the right move.
First charge mortgage rates, as we are all too aware, have been on a steep upward trajectory as the UK and global economy face uncertainty. Some might argue that 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’ last weeks as Prime Minister. Indeed, with the recent revolving door at Downing Street, it might be advisable to wait a while before letting out a sigh of relief at our newfound stability.
So, with rates looking set to at least remain high, if not rise further, even those 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, in order 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 up a positive relationship as an added bonus – in an even more meaningful way, this conversation might 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 batten down the hatches, pull products and take an increasingly careful approach to lending. The second charge market is no different, and lenders continue to either increase rates or pull them all together, reducing the availability of products on the market.
For all of these reasons, demand is only going to stay strong, which means that whichever lender is offering the most appealing rate risks being flooded with applications, and these products and pricing are frequently being changed, with the lowest rates often lasting only a short amount of time before being withdrawn.
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. We are immersed in the market every day – so you don’t have to.
While a second charge might not be the best solution for every situation, they will be for some – and with the approaching Consumer Duty deadlines looming, this means a greater emphasis on brokers disclosing limitations in their scope of service and the full range of options available.
At Brightstar, we understand that not all brokers will be able to advise on all options – it’s practically impossible to be an expert across all areas of secured lending. But, where a product lies outside of 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 offer a more suitable solution for their circumstances.
Doing the right thing for the client, including talking them through every option available to find a positive outcome that fits their individual needs, is the norm for any broker worth their salt. Often, though, seconds can get lost in the noise. In order to make sure that your duty to the consumer is fully satisfied, now is the time to get talking about second charges.
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