They are being taken out for various reasons
The market for second charge borrowing continued to strengthen over the last quarter, with a noticeable increase in both the volume and value of second charge mortgages taken by prime borrowers.
This was revealed by second charge lending specialist Evolution Money, citing the latest results from its quarterly data tracker, which reviews a host of information to offer advisers insight into the reasons why a second charge mortgage might be suitable for their clients.
Evolution Money analysed data from two different types of second charge mortgage products, split between those borrowers using the loans for debt consolidation purposes only, and those clients who have prime credit ratings.
The latest tracker showed that prime borrowers are able to use their loans for other purposes, not just debt consolidation, and this iteration shows continued growth.
Looking at its total lending data for the last three months, up until the end of August 2022, the product split by volume of mortgages is 68% debt consolidation and 32% prime; by value, it is 59% debt consolidation and 41% prime. This is compared to the previous quarter where both the volume and value of lending to debt consolidation borrowers were 1% higher.
Read more: Second charge lending hits fourth record month of the year.
The lender said that while pricing had also risen in the second charge space, borrowers were not willing to pay large early repayment charges on their first-charge products in order to remortgage, especially as they were likely to be moving to a higher rate. Instead, borrowers were looking for shorter-term solutions that could allow them to access increased equity built up over the past few years.
For those borrowers specifically using a second charge mortgage for debt consolidation purposes, the average loan amount has continued to increase, from £24,438 up to £24,949.
The average term for these borrowers has also increased to 131 months. However, the average LTV has fallen again to 68%. Borrowers, on average, were consolidating an increasing number of specific debts up to six from five last quarter, and the average value of the debts consolidated had also increased to £18,306.
Read more: Second charge lending continues annual surge.
Evolution data also showed the most common uses of a debt consolidation second charge mortgage. Over 60% were used to pay back a loan provider, followed by over 40% paying a bank, with close to 9% repaying retail credit, followed by car finance at just over 5%.
For prime borrowers, the average loan amount has also increased but only slightly to £36,377, with the average term also having increased to 154 months, with the average LTV continuing to fall to 66% from 66.5%.
Prime borrowers are increasingly taking out second charge mortgages for debt consolidation, up to 63% from 58.2%; home improvement and some consolidation, 26.5%, down from 27.7%; and home improvement, 21%, up from 16.8%.
Borrowers were also utilising second charge loans to pay for vehicles, to pay for weddings, and to fund existing business loans and ventures. The average number of specific debts being consolidated by prime borrowers remained at five. However, the average value of the debt continued to increase this quarter, up to £24,732.
“At the moment, we continue to see a trend whereby prime borrowers are an increasing percentage of both the volume and the value of the second charge mortgages we provide,” Steve Brilus, chief executive at Evolution Money, commented. “Again, we have witnessed this, particularly throughout 2022, as interest rate rises have been a major consideration for those who might ordinarily remortgage their first-charge in order to access equity.”
