Second charge sees rise in large loans and home improvements
Second charges can sometimes be pigeon-holed as a product only suitable for borrowers with a poor credit history or as a vehicle solely used for debt consolidation, but this is not so.
In fact, we have seen an increase in interest from high-net-worth individuals during the pandemic, and this has escalated since the start of this year.
From the end of the first Covid lockdown, there has been more demand from high profile borrowers wanting large loans particularly for home improvements and property purchases. They have been turning increasingly to second charge mortgages to raise substantial amounts of money.
There is a need for greater flexibility in loan sizes which cannot always be obtained via a further advance or a remortgage to complete significant high-end refurbishment projects. This in turn has led to us seeing a different type of borrower who typically owns high-value property at £1m plus. With loan sizes available up to £500,000 at 65 per cent LTV and record low-interest rates, second charges can be an attractive alternative to a remortgage.
Pandemic home improvements
The pandemic has changed the living requirements of many people who find themselves both living and working from home. They want more space for an office or to home school their children so there has been an uplift in extensions and loft conversions.
By being forced to spend more time at home due to lockdowns, people are looking to improve their surroundings so opt for a new kitchen or bathroom or completely redecorate the house. They may want to landscape the garden so they can have family and friends over in a Covid secure outside environment or create a children’s play area.
Often there is a large amount of equity in their home and therefore a smaller LTV. Their first charge mortgage rate is low which can mean it is often best advice to avoid disturbing existing mortgage arrangements, and in addition, any early repayment charges would make it expensive to remortgage.
This is a great opportunity for brokers to advise people of another option, which is to raise the required finance via a second charge loan.
Because loan sizes are generous in the second charge market, terms can be flexible. For example, if a borrower has 15 years remaining on their first mortgage, they have the option of taking a second charge of up to 30 years. And this also includes flexible features such as the ability to make overpayments.
In addition, we are seeing more HNWs wanting second homes and using secured lending for the deposit. This can be for people living in city centre apartments wanting a rural retreat or a country or seaside bolt hole.
Conversely, there are borrowers taking advantage of the downturn in property prices in cities like London, particularly HNWs investing in buy-to-let property. The second homes and BTL investments have also been spurred on by the stamp duty holiday – now extended until the end of June.
We expect to see this trend in borrowers owning expensive property requiring larger loans to continue. The pandemic has changed our lives in many ways and our homes are seen as ever more important with people wanting to make improvements to their surroundings or acquire further properties for personal use or investment purposes.