Debt consolidation drives second charge mortgage growth

Debt consolidation drives second charge mortgage growth

The second charge mortgage market has seen continued growth with a 54 per cent monthly increase in April - an 83 per cent increase on the previous year. 

Monthly figures released by Finance & Leasing Association (FLA) have shown that the value of new business reached £127mn in April of this year, with 2,802 new agreements. 

Of these, 53 per cent were for the consolidation of existing loans, 16 per cent for home improvements, and a further 25 per cent were for both loan consolidation and home improvement.

Chief commercial officer at Freedom Finance, Andrew Fisher said he expects to see this continued growth accelerate through the year as the current economic environment may lead people to capitalise on property equity following the boom in house prices through the pandemic.

“This has enabled more homeowners to look towards second-charge mortgages as a means of using the value of their property for other means. For example, they now may be able to use second-charge mortgage borrowing to finance home improvements like installing a home-office, improving the insulation of the property or installing greener energy sources like solar panels.

“As the cost of borrowing rises and household budgets are squeezed, debt consolidation is likely to be another major theme of the current inflation shock, and second charge mortgages can be a timely and favourable method of clearing or reducing existing debts.

Fisher added: “Given the recent increase in interest rates and potential further hikes from the Bank of England, those on longer-term fixes may be reluctant to re-mortgage given they would likely move on to a more expensive rate and may also face a hefty early repayment charge – second charge mortgages serve those customers’ needs very effectively."

Financial adviser at Spellman Financial Services, Luke Spellman said that he has seen a large number of applicants looking to release equity in recent months with notable reasons being debt consolidation and home improvements which in his view go “hand in hand with the rising cost of living”.

Spellman said: “The reason applicants are likely turning to second charge mortgages instead of further advances with their existing lender could be down to the applicants not meeting affordability or credit criteria with their existing lender.”

Earlier this month (June 2022) LV released figures that showed 12 per cent of retirees had outstanding mortgage debt when they retired while a third of mortgage holders do not think they will have paid their mortgage off by the age of 65.