Stewart Simpson, Second Charge Mortgage Specialist at Brightstar Financial
In June 2022, the Bank of England’s (BoE) Monetary Policy Committee raised the base rate to 1.25%, in a move that came as a surprise to very few. While this is still a historically relatively low rate, we have already seen lenders pass these increases on to customers, and the BoE has made it clear that we should expect rates to rise again in August and on into 2023.
Meanwhile, the Office for National Statistics (ONS) reported in April that 23% of UK adults are already finding it difficult or very difficult to handle their monthly household bills compared with 12 months ago, and the cost-of-living crisis is only likely to worsen.
Many borrowers will be looking for ways to proactively manage their finances, shore up any debts, and open avenues to additional funds. It is therefore worth exploring how second charge mortgages might come into play, particularly when it comes to making debt more manageable.
Those who own their own property might do well to consider a second charge, rather than a remortgage or unsecured personal loan. By accessing the equity built up in their property, borrowers can take advantage of soaring house values, while avoiding early repayment charges (ERCs) and other penalties that might come into play when remortgaging, as the first charge remains intact.
If a borrower holds a number of disparate debts, they are likely paying interest on each, not to mention dealing with the pressure of managing various monthly payments. By using a second charge mortgage to release equity from their home, borrowers can streamline their debts into one monthly amount, helping avoid potential missed payments and the resulting impact on credit.
In addition, second charges are often available at a lower rate than unsecured borrowing and can be taken out over longer terms. While this locks the borrower in for more years of debt, it can substantially lower their monthly outgoings, at a time when many are wondering how to make their wages last.
Second charges are not just for owner-occupiers, either, and can be taken out on second homes and buy-to-let properties. They also tend to be easier to access than unsecured, which might appeal considerably to those with a complex background or income structure, such as the self-employed.
Brokers and their clients should be weighing up these benefits sooner rather than later, as rising inflation means that leaving this decision for much longer could see borrowers losing out on current rates.
In April 2022, The Money Charity reported that the average credit card debt per household was £2,192, an 8.7% increase over 12 months, while the average UK adult had unsecured debt worth £3,817. The overall average household debt was found to be £64,286. Meanwhile, UK house prices have increased by 12.4% over the same period, according to the ONS.
Second charges tend to be subject to higher rates than first charges, but deals are still available at interest rates of under 5%. In comparison, The Guardian recently reported that average credit card rates had reached an incredible 21%, and were only set to keep rising.
To illustrate using those Money Charity figures, a loan of £64,286, taken over 10 years at a rate of 3.92% could mean monthly repayments of £648, with a total cost of £77,811. However, an unsecured loan over the same period at a rate of 21% would mean monthly payments of £1,209 for a total repayable amount of £145,086.92.
The longer terms might balance this disparity out somewhat, but even shifting the second charge terms up to 25 years in this scenario only brings the full repayment amount to £100,948. The difference between secured and unsecured debt is clear, not only in the ability to create smaller monthly outgoings but to save money long-term.
There are, of course, risks when it comes to taking out a second charge. The primary concern should be that failure to repay either the first or second charge may result in the borrower losing their home. These figures are also just examples, and the reality might be different when individual circumstances are taken into account.
As with any financial product, it is integral to work with an expert who can investigate all the options, understand the potential risks and fees, and consider the individual circumstances and needs of the borrower themselves.
While a second charge may not be perfect for everyone, it is an important tool to wield in the face of rising rates and the cost-of-living crisis. If ever there was a time to speak to your clients about their options for freeing up spare funds and streamlining their finances, that time is now.
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