Why an older borrower might benefit from a second charge

“There can be a misconception that by the time they are approaching retirement, their finances are in check and they are less in need of additional borrowing – yet this isn’t always so.”

Given most of us will not retire until we are well into our 60s, there are potentially still a number of doors open to older homeowners looking to raise additional funds – a second charge mortgage being one of them.

Recent figures from Savills shine a light on the sizable chunk of housing equity many older borrowers are sitting on. Having benefited from several decades of housing booms, it is estimated the over-50s hold around 78% of all of the UK’s private housing wealth. For those aged 50-64, this equates to an estimated £2.183 trillion of housing equity.

Nevertheless, many may still be paying off their mortgage and face the same predicament as their younger counterparts when it comes to raising additional funds. Do they break from their competitive long-term fixed rate mortgage early to remortgage – potentially paying a higher future rate and Early Repayment Charge (ERC), or do they keep it in situ and raise money another way?

Aside from equity release, the options and needs of older borrowers have at times been overlooked in the mortgage market, in favour of helping younger demographics. Yet, this group of borrowers can still face many of the same issues.
They may be self-employed, for example, or have recently suffered a financial setback that means their credit score has deteriorated, calling for a more flexible approach to their underwriting.

Like many first charge mortgages, second charges can also run up to the age of 70 – making them a viable option for older borrowers, who may already be retired or approaching retirement and have a suitable source of income.

Perhaps due to the amount of equity held by many older borrowers, there can be a misconception that by the time they are approaching retirement, their finances are in check and they are less in need of additional borrowing – yet this isn’t always so.

Around half – 44% – of people over-50 have some form of outstanding debt, according to research from SunLife. Within this, a quarter – 33% – who are not yet retired have outstanding credit card debt and 19% a personal loan.

On average, non-retired over-50s have £66,718 outstanding on their mortgage, owe £3,008 on credit cards, £11,916 on personal loans and £6,936 through other forms of debt. While 16% had paid off one or more personal loans in the last five years, 19% had not paid off any debts in full.

With the cost of living crisis showing no signs of easing, for older borrowers planning ahead and looking to tidy up their finances ahead of retirement, a second charge debt consolidation loan could help ease their financial pressure.

At the other end of the scale, there will also be older borrowers who are in little or no debt but still lack the disposable income to carry out things such as home improvements. While they might have a sizable amount of equity in their property, not all will have cash readily available.

Advisers may well see demand for home improvement loans among older borrowers increase further still, as they look to reduce their energy bills and carry out energy-efficiency improvements – potentially looking to save money as they move towards retirement.

We are already seeing the trend to ‘improve rather than move’ in the equity release market, with the latest equity release drawdown data from Legal & General Home Finance showing 54% of homeowners are releasing funds via a lifetime mortgage for home improvements.

For those still paying back their mortgage and as such may not qualify for equity release – a second charge could be an option. Given most home renovation projects – if done correctly – improve a property’s value, borrowing for this purpose can be beneficial.

We hear the phrase ‘asset rich, cash poor’ a lot in financial services and for a certain group of older borrowers this certainly rings true. As the demand for second charge mortgages continues to rise, we expect older borrowers to form part of this growth going forward.