Why high net-worth borrowers are increasingly turning to second charge loans
By Marie Grundy, Managing Director Second Charge, West One Loans
How do high net-worth individuals (HNWs) raise money when they need it? Do they sell their investments? Approach a private bank, perhaps?
Would you be surprised to hear they are increasingly turning towards second charge mortgages?
Some brokers and clients subscribe to the outdated view that second charge loans are for less creditworthy borrowers or for those who have been rejected by High Street lenders.
But, at West One, we have noticed that wealthy individuals and high earners are far more open to the idea of a second charge mortgage than they used to be.
In fact, we have seen a 73% spike in second charge mortgage enquiries from borrowers looking to borrow £150,000 and above over the past year, disproving the idea seconds are solely for low-earners with credit problems.
Indeed, many of these HNW borrowers have excellent credit scores and are asset-rich or earn at least a five-figure salary – and often both.
Looking at our completions data since the start of the year, those borrowing more than £150,000 had a property worth an average of £1.2 million.
So, why then are HNWs turning to second charge loans and what are they using the money for?
Let’s tackle the first part of that question to begin with. In short, their rationale for taking out a second charge mortgage is not too dissimilar from other borrowers.
Often, it is because they are on a favourable first-charge rate that they don’t want to give up which is particularly relevant now we are in a rising interest rate environment. Or, perhaps they are part-way through a fixed rate and want to release some cash but they don’t want to get hit with steep early repayment charges by remortgaging.
Second charges can also cater for borrowers who need access to larger loan sizes which might not be available through a further advance.
Typically, many HNW’s want to release extra money from their property to complete high specification home improvement projects or purchase a second home or investment property.
For example, one client of ours recently borrowed £348,000 against a five-bed property worth £1.6m in the South East of England in order to carry out a range of high-end home improvements, including a wrap around extension, doubling the floor space of the property, and the installation of both a swimming pool and cinema room. The second charge allowed them to keep their low first-charge rate and to complete the refurbishment of their property in full, adding significant value to it in the process.
Another borrowed nearly £250,000 against a £1.4m four-bed property in Surrey so they could carry out home improvements on their main residence but also acquire a further investment property.
The borrower had looked to remortgage their first-charge, but the early repayment charges meant it didn’t make financial sense. On top of that, the second charge completed within 11 days – much quicker than a first-charge loan – meaning the money was in their account much sooner.
The beauty of a second charge is that the rates these days are competitive, the application process is quick and, depending on personal circumstances, the loan sizes can be generous.
It just goes to show that seconds are no longer the last resort of people who have been rejected by the High Street. It’s now a mainstream option for people right across the wealth spectrum.
So, next time your wealthy clients are looking to borrow money, it is worth considering the humble second charge mortgage as an option.
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