How is the second charge market performing?

In days gone by, when our parents or grandparents took out a mortgage, it was usually a single, lifetime loan from one lender, which they were dedicated to paying off as soon as possible.

Now though, in an ever more competitive market and faced with cost-of-living pressures, consumers may consider a separate second charge mortgage - a loan secured on a property which already has an existing finance agreement - to cover big expenses such as home improvements.

The value of second charge loans taken by borrowers in 2024 is higher that it’s been for some time, according to the co-founder and director of broker firm Loans Warehouse. Matt Tristram attributes the boost to the impact of what he considers ‘two years of unprecedented rate rises in first mortgage lending’.

“The second charge market is thriving,” Tristram (pictured) told Mortgage Introducer, “with the FLA (Finance & Leasing Association) figure expected to exceed £170,000,000 for July. This would surpass the post-mini-budget figures and be the highest for some time.

“There are literally hundreds of thousands of clients sitting on long-term fixed rates starting with a one. Any remortgage activity would likely cause their main borrowing rate to jump to 4 or 5%. So, unless the money is urgently needed, people aren’t touching their mortgages. What alternatives are there? Of course, a second charge.”

The rates within the second charge space are closer than ever to first charge rates, Tristram suggested. These allow borrowers to access large sums at fixed rates, which can align with their first charge fixed rates, and enable them to remortgage later with minimal early repayment charges.

Why are second charges in increasing demand?

Lenders – such as Pepper Money and United Trust Bank - have made significant strides in improving the application process for both brokers and clients, Tristram said. Technology improvements are also being made which are supporting the sector. Brokers understand second charges and are increasingly engaged with the sector, he observed.

“It’s not rocket science,” Tristram reasoned. “If a client is looking to raise additional borrowing and you can’t help, or it’s not advisable, consider a second charge.”

Identifying distribution as key to the second charge market, Tristram referenced the small number of brokers who are on five, six or seven network panels, with only one or maybe two BDMs.

“Networks need to view second charges in a different light,” he said. “Simply having a panel and saying ‘crack on’ isn’t sufficient anymore. You need to approach second charges as you would insurance - whenever you’re remortgaging or raising funds, consider a second charge. Even if only one in 10 times a second charge is the better option, that’s still a significant percentage.”

Read more: Interbridge Mortgages enters second charge market

What is the future of the second charge market?

Clearly confident about how second charges will grow in popularity, Tristram expects more entrants to the sector this year and anticipates further growth.

“I would say the second charge market has a bumper two years ahead,” he predicted, “as the fixed-rate trap is making borrowers think twice about remortgaging due to the rate rises since their last fix.”

The performance of the second charge mortgage market was subdued throughout much of 2023, but Fiona Hoyle, director of consumer & mortgage finance and inclusion at the FLA, said that in June the sector reported the highest number of new agreements since September 2022.

“The market grew each month in the first half of 2024,” she shared. “New business by value and volume grew in the first six months of 2024 overall by 17% and 12% respectively, compared with the same period in 2023.”

Hoyle added that 59.2% of new agreements were solely for the consolidation of existing loans, while 23.1% were for home improvements and the consolidation of existing loans - and 12.5% were for home improvements only.

Ryan McGrath, second charge sales director at Pepper Money, has described the second charge market as one of the largest areas of untapped opportunity in mortgages, presenting an excellent way to release capital from customers’ homes. Pepper is actively working with brokers to ensure more customers recognise the benefits of second charges, he said.

“The second charge lending landscape is becoming even more competitive,” McGrath noted. “Lenders have an appetite to lend and households across the country have a requirement to raise funds to help them achieve their goals.”