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Second charge mortgages increasingly used by homeowners

Second charge mortgages increasingly used by homeowners
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Posted:
23/10/2024
Updated:
23/10/2024

Increasing numbers of homeowners are using second charge mortgages in the post-pandemic era, new research reveals.

The analysis by Pepper Money suggested homeowners are raising the extra cash through this type of homeowner loan for a variety of uses.

These include debt consolidation and home improvements, as well as for paying tax bills, and even to fund deposits for buy-to-let investments.

The analysis was based on its own lending to more than 7,500 applicants.

It also combined monthly data from the Finance and Leasing Association (FLA) with quarterly data from the Bank of England’s Mortgage Lenders and Administrators’ Returns (MLAR).

Analysis of that data found that second charge mortgage lending to UK consumers grew 17% year-on-year in the first half of this year.

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Growth in second charge lending

It means second charge mortgages recorded the fastest growth rate of any market segment.

It beat the 13% growth in first-time buyer lending and 5% growth in further advances.

All other market segments saw a year-on-year decline in lending activity between January and June 2024.

With homeowners accessing £804m of equity between January and June, second charge mortgages were responsible for more than 10 times the lending activity seen in the buy-to-let (BTL) market at £804m compared to £76m.

Pepper Money’s analysis shows the same growth trend played out across both a two-year and five-year timeframe.

Comparing the first half of 2019, the year before the pandemic, lending via second charge mortgages has grown at twice the rate – at 28% – of any other segment across the intervening years.

First-time buyer lending again is the nearest challenger, but trails behind in second with a 13% post-pandemic growth rate.

Second charge mortgages also stand out as the only segment of the mortgage market that performed stronger in the first half of 2024 than it did during the first half of 2022, before the infamous Autumn ‘mini-Budget’ that led to a steep rise in interest rates.

Following the pandemic, homeowners accessed £3.2bn via second charge mortgages during the last 10 quarters, up until the second half of this year.

It is 27% higher than the £2.9bn of lending during the equivalent period before the pandemic.

Homeowner loans allow customers to access the equity locked up in their homes without impacting their existing mortgage rate.

As a source of capital for home improvement projects or to consolidate debts, they offer an alternative to credit cards or personal loans.

Rates are typically lower, funds can be repaid over a longer period of time and customers can make unlimited overpayments.

Ryan McGrath, director of second charge mortgages at Pepper Money, said: “Make no mistake, taking out a homeowner loan is still a niche pursuit, but we’re starting to see this change as customers realise the financial firepower they have stored away in bricks and mortars.

“Without doubt, there are too many people who only think of personal loans or credit cards who might benefit from carefully considering whether a homeowner loan could be a better fit for their needs.

“It’s vitally important we tackle this awareness gap because otherwise, customers will keep taking non-advised, unsecured products when they might be better served, and better off as a result, by at least considering their options more broadly and seeking advice about a secured homeowner loan.

“Bricks and mortar are an untapped resource when it comes to helping UK households pursue their financial ambitions.

“Second charge mortgages are steadily coming into their own in the post-pandemic landscape and we fully expect this trend to continue.”