It is undoubtedly the case that the core uses for second-charge loans, such as for home renovations or consolidating debt, have not disappeared with the pandemic.
If anything, they have become even bigger drivers for borrowers.
One additional area where second-charge loans could prove particularly useful, but which may not be on the radar for mortgage advisers, is for clients classed as being in ‘persistent debt’.
What is persistent debt?
Last year, the FCA introduced a new definition for borrowers in what it termed as ‘persistent debt’.
This was classed as borrowers who have been charged more in interest and fees on their credit card and have paid just the minimum payment for the preceding 18 months.
There is no shortage of ‘persistent debt’ borrowers either. A study by the FCA last year suggested there are as many as three million credit card customers who are in persistent debt, who have paid an average of around £2.50 in interest for every £1 repaid.
Given the difficulties of the last year, let us be clear – the number of persistent debt borrowers is only likely to have increased.
So, what is that got to do with second-charge mortgages?
Well, credit card providers are required to write to borrowers in this position and put together a plan with them to start actually clearing that outstanding debt.
If they can’t, then spending on the card may be frozen.
Now, for some borrowers this won’t be a huge problem. They may have the disposable income to increase the amount they are paying each month, or even simply pay off their balance each month, and carry on as usual.
But let us be clear, the pandemic means there are far fewer borrowers in a position to just absorb those larger payments without it causing further issues.
As a result, these borrowers face having their cards frozen unless they can come up with the funds to get out of this persistent debt classification.
With a second-charge mortgage, homeowners can tap into the equity they have already built up in their property, releasing money to clear that outstanding credit card debt and maintain the card as a spending option, without having to touch their existing mortgage.
It’s a smart way to sidestep any potential early repayment charges or the risk of having to move to a higher interest rate on their first-charge mortgage.