Charity sounds warning as number of second mortgages hits nine-year high
A leading debt charity has warned that homeowners may be piling up credit after new figures revealed that the number of second mortgages has reached its highest level since 2008.
Data from the Finance & Leasing Association (FLA) shows that £93m of second charge mortgages were taken out in March – a nine-year high.
Second charge mortgages ‘a useful product’
A ‘second charge mortgage’ is a loan that allows a homeowner to access some or all of the equity in their home. It is usually obtained from a different lender than the main mortgage and they are often taken out when borrowers are unable to refinance their main mortgage.
Homeowners take out a second mortgage for a variety of different reasons. Fiona Hoyle, head of consumer and mortgage finance at the FLA, says: “Second charge mortgages are a useful product, with consumers taking them out for a variety of reasons, including home improvements, or paying the deposit or removal costs for a son or daughter moving into their first home.”
The FLA reports that £93m of second charge mortgages were taken out in March, up 22% on the previous month. Just over 2,000 loans were taken out, representing the highest value and volume of loans in a month since the 2008 financial crisis. The FLA says: “The strong performance ... could be the early signs of a return to form for this important market.”
Since March 2016, both first and second charge mortgages are now regulated under the same regime by the Financial Conduct Authority (FCA), while interest rates on these deals have fallen.
The lowest rate in 2012 was around 6.9%, but they now start at around 4% to 4.5%, according to mortgage expert Alistair Hargreaves. He adds that in some cases, such as where the homeowner had some adverse credit, rates could be a lot higher – around 9% to 12% – but that “you are [often] paying 20% on a credit card”.
Debt charities worried by rise in second mortgages
The recent rise in second charge mortgages has alarmed some debt charities. A significant rise in this type of lending before the ‘credit crunch’ was seen as a sign of consumers taking on unsustainable levels of debt that left them vulnerable to an economic downturn
The Bank of England has recently warned that consumer credit is rising quickly and The Guardian reports that officials have begun a review to consider possible restrictions.
Debt charity StepChange said the rise in debt from second mortgages left thousands more families vulnerable to higher levels of inflation and a slowdown in wage rises, divorce or redundancy.
Peter Tutton, head of policy at StepChange, said: “The next government, regulators and lenders need to ensure that the mistakes made in the lead-up to the financial crisis are not repeated and that there are better policies in place to protect those who fall into financial difficulty.”