Rising House Prices and Equity Increases for Homeowners Sparks a Growth in the Second-Charge Loans Market

As the average cost of a home in the UK continues to rise, homeowners are reaping the benefits of the additional equity in their properties and finding financing options more readily available to them than they were before.

The Nationwide Building Society has released data showing a 14.3% rise in house prices since March 2021, benefiting many homeowners who are seeing a significant increase in the equity they have in their property.

Nationwide’s data, tracked over a two-year period, shows that since the early days of the pandemic (March 2020), the average value of a home in the UK has risen by a remarkable 21%. As an example, a property that was valued at £300,000 at the beginning of the first lockdown could now be worth as much as £363,000.

Wales has seen the biggest increase in property prices, reporting an annual increase of 15.9%, according to Nationwide’s statistics.

With the expectation that house price growth will slow down in the months to come, the Royal Institute of Chartered Surveyors is still confident that there will be further increases this year.

Borrowers looking for second-charge loans are finding it easier due to the added equity available in their homes due to the price increases. The more equity they have, the more they can lend, and the better the interest rates available to them will be. This could be a great opportunity for people looking to consolidate debt and get their finances in order, which, in the current climate, is advisable.

But second-charge loans or remortgaging are not purely for people looking to consolidate; the market is seeing a rise in the number of prime borrowers accessing the equity in their properties. This increase is not surprising when looking at the record low-interest rates for fixed 5-year first-charge loans in the last few years.

These borrowers may have committed themselves to a mortgage that has a heavy ERC (early repayment charge) if they wish to switch mortgages. Taking out a second-charge loan could be more beneficial and cheaper in this circumstance, as the first-charge loan would remain in place.

Five-year fixed-term mortgages have seen a surge in popularity over the last five years. Over 50% of the home loans approved by Santander recently were reported to be five-year fixed-term mortgages.

Moneyfacts released data showing that the average interest rate on a five-year fixed-term mortgage was around 2.88% in March 2022, which is not a long way from the figure back in March 2017, which sat at 2.93%. However, it was up from the February 2022 figure of 2.71%.

Those with credit card debt and the self-employed may also find more doors open to them in regard to second-charge loans and may be eligible for the first time due to the added equity available for release in their homes.

These borrowers may not be eligible to apply for additional funds from their first charge lender and may have issues with their credit history, for example, if they hit hard times during the pandemic. With the added equity, it is likely that they will have more access to remortgaging and second-loan finance products.