We’ve had a big focus on second charge lending at Brightstar Financial in recent months. First charge lenders are tightening their appetite at higher LTVs, which is restricting options for capital raising by remortgaging and further advances. At the same time, home improvements are rising up the agenda for millions of those who spent lockdown identifying changes they wanted to make to their property, and debt consolidation is likely to become a bigger consideration for many as we emerge from the pandemic.
However, according to a recent poll we carried out amongst a group of more than 1000 brokers, 74% admitted that they didn’t talk about second charge mortgages whilst working on their clients’ purchase or remortgage, or indeed at any point during the term of their product.
It’s now more than four years since second charge mortgage lending came under FCA regulation alongside the first charge market and brokers have been required to consider second charges alongside other options for capital raising. So, the fact that three quarters of brokers don’t mention second charges is certainly startling. It’s not surprising, however, as this research merely supports the anecdotal evidence that we hear day in, day out.
A second charge mortgage will not be the right option for everyone, but it will be the right option for some, and there are many circumstances where it can be the most cost effective and suitable solution. Take this real life case that we recently worked on for example:
Mr & Mrs X were in a fixed rate period that was due to end a couple of months after the date of their enquiry. They had accrued just over £50k in unsecured credit since taking out their mortgage and were paying £1600 per month to service the debt. They also wanted to raise an additional £6k for home improvements.
The couple approached their mortgage adviser to ask about a remortgage to consolidate their unsecured debt and also raise the additional funds. However, they were declined by several first charge lenders on the basis of failed credit score, affordability, or both.
In addition, the pandemic hit, and one of the clients were furloughed which meant that even the second charge mortgage route was no longer an option. However, as lenders came back into the market, we were able to identify a solution that enabled the clients to meet their borrowing objective and make significant savings on their monthly costs.
Their mortgage adviser recommended a product transfer onto a flexible fixed rate, which featured no ERCs and the peace of mind of having fixed monthly payments.
At Brightstar, we were then able to complete a second charge mortgage that raised enough capital to clear all unsecured credit commitments plus the £6k required for home improvements.
The clients opted for a 5-year fixed rate with no ERCs at a rate of 5.1%. The term of the second charge mortgage was matched to the term of their main mortgage to keep payments low, and the plan is to revisit the option of remortgaging in the future to take out the second charge.
As a result of this, Mr & Mrs X reduced their monthly payment to £325, saving a staggering £1275 per month. In addition, as well as the satisfaction of securing a great outcome for their client, the broker was paid for the product transfer and the second charge mortgage.
Time for action
There are many circumstances like this where a second charge can provide a client with the most cost effective and flexible solution to meet their needs, yet as a product category, it is still largely overlooked. So, what’s the answer?
The first response is often to call for more education. This certainly has its place and there will always be opportunity to make brokers aware of the features and uses of a product that they may not have previously realised. However, the most common reason given by brokers for not talking about second charge mortgages in our research was not that they didn’t have the right knowledge but that they did not have the time, or simply forgot.
So, it’s perhaps not education that is now needed, but action to change behaviours and help develop new habits. There are numerous academic studies which show that simply knowing something is often not enough, it usually takes changes to a physical environment or process to change behaviour. This is sometimes known as “choice architecture” or “nudging” and it’s being studied with a view to promoting healthier lifestyles – but it can also promote healthier businesses.
There is a very positive message to take from our research. Three quarters of brokers now have a great opportunity to boost their business levels as we move into next year. It’s widely anticipated that the purchase market will slow down in 2021 with the removal of Help to Buy and the end of the Stamp Duty holiday, but the second charge mortgage market is set for growth as demand increases from customers who want to release capital from their home.
There’s a big opportunity in second charge mortgages but knowing about the opportunity is not enough. The key will be in taking steps to amend processes, flag reminders and encourage new conversation. Now is the time to take action.
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Source: Mortgage Strategy