2023: Take the time to consider seconds
To say 2022 has been eventful is an understatement, with global, political, and economic issues impacting the mortgage industry and customer’s finances. However, there are some silver linings to be found when we look back at the past year, particularly when it comes to the second charge market.
According to December’s Finance & Leasing Association (FLA) data, seconds continued a strong period of growth in October 2022, with more than 3,000 new agreements, 57% of which were for loan consolidation, 15% for home improvements, and 22% for a combination of both. There was also a 31% increase in terms of value compared with the previous year, with a large proportion of these loans being used for debt consolidation, helping some customers to combat rising borrowing costs.
Continuing the trend
Looking ahead to 2023, I think we can safely say that many of the factors contributing to a continued rise in the popularity of seconds are going to continue. Some of these are more positive than others.
To start with the bad news, the cost-of-living crisis is only going to worsen as we emerge into 2023, and with rising food and fuel costs comes the likelihood that customers will either enter into or increase debt, as well as being more likely to struggle with repayments.
Pepper Money’s Adverse Credit and Self Employment Study 2022-2023 shows that 71% of consumers are concerned about their financial situation as a direct result of the current economic situation, while 76% felt that adding £100 to their monthly bills would significantly impact their finances. Considering what we know about the trajectory of bills in the next few months, not least with the sudden onset of cold weather, this is a reality for many people – meaning less money to repay their bills and a growing likelihood that their credit will worsen as a result.
This is a vicious cycle, but one that can in many cases be mitigated by leveraging property. There are, of course, multiple avenues through which to do this, but with mortgage rates at a higher level than we have known for many years – and news of yet more base rate hikes coming down the line – customers may shy away from remortgaging to raise capital.
This is where second charges can be invaluable. By using the value of their home after their remaining mortgage to secure a long-term, lower cost loan, borrowers can use seconds to streamline their finances. In the right circumstances, this means lower monthly repayments compared with consumer credit – credit card rates reached their highest level in two decades in 2022, and 2023 looks to herald much of the same as inflationary pressures continue. At the very least, having one, simple monthly repayment can help borrowers streamline and regain control of their finances, at a time when money is having a heavy impact on the nation’s mental health.
Turning to more positive factors, according to UK Finance, 2023 will likely see sales drop from 1.2 million to 1 million, while the value of lending will drop by 23% for homeowners and 27% for landlords. At first glance, this might not seem positive, but there is a silver lining. Many homeowners – their plans to move stymied by rising mortgage rates, not to mention the risks of selling in an uncertain market, and the added costs of moving – will be taking a closer look at their current properties.
Extending, refurbishing and adding the latest amenities could not only soften the blow of a delayed move, but also add value to the property when the market does eventually settle. Once again, remortgaging will look less appealing to many customers, and using a second charge might be the answer instead.
Finding the right solution
2023 certainly looks like it will continue to fuel the flames of demand in the second charge market – something to be celebrated at a time when most predictions for the year ahead are relatively negative.
A second charge will not always be the right option, and it is important not to push customers – particularly those considering debt consolidation, who might already be vulnerable both financially and mentally – into a product if it is not entirely right for them. Similarly, there will be many customers for whom a second charge mortgage presents the most appropriate option for capital raising.
This is a tenet that should, of course, already underpin anyone operating in this market, but many brokers fail to consider or offer second charge mortgages, preferring to recommend remortgages or further advances.
This will become more important from July 2023, when the Financial Conduct Authority (FCA) implements the first wave of its new Consumer Duty regulations. At their core, these regulations codify the need to provide holistic advice that considers the full range of products available to customers, even when these are outside of your own remit, with clear signposting and referrals if the best option is not one you are personally able to provide.
Each customer is subject to different circumstances, and there is no one-size-fits-all solution. This regulation will hopefully drive onward this market’s existing urge to provide the best customer outcomes during difficult times.
Head of Sales,
Second Charge Mortgages
at Pepper Money