Homeowners being pushed into debt consolidation loans, FCA warns

Poor standards in the second charge mortgage market are putting borrowers at risk of financial harm, the UK’s financial watchdog has warned.

Second charge mortgages let homeowners borrow extra money using the equity in their home, without having to change their current mortgage.

But they’re often used by people who already have high levels of debt and aren’t very financially resilient.

The Financial Conduct Authority (FCA) believes many are being put at risk by weaknesses in some lenders and brokers’ practices, such as:

• customers being steered towards debt consolidation when it wasn’t clear if this was appropriate for them
• affordability assessments apparently not considering key living costs
• inadequate record keeping
• unclear fees making comparisons difficult

The FCA acknowledged it did find examples of good practice across the sector.

However, it said it's concerned about whether some firms are meeting expectations.

Second charge mortgages currently only make up a small proportion - less than 4% - of the total mortgage market.

What needs to change?

Second charge firms have been urged to take steps to improve their processes and make sure customers fully understand what they’re signing up to.

“The second charge market is relied on by people often already heavily in debt,” said David Geale of the FCA.

“It’s vital it works well, but we’ve found that standards are not always where they need to be.

“This needs to change.”

What to consider before taking a loan secured on your home

If you’re thinking about borrowing more against your home to pay off other debts, it’s important to understand the risks.

Remember your home could be at risk

Loans secured on your property mean your home could be repossessed if you can’t keep up repayments.

Check whether consolidating debts will actually save you money

Rolling credit cards or personal loans into a longer-term loan can reduce monthly payments, but you may end up paying more in interest overall.

Compare fees carefully

Some lenders charge broker fees, arrangement fees or early repayment charges, which can make deals harder to compare.

Consider all your living costs

Before taking out any loan, lenders should check you can afford repayments once essential costs like food, bills and childcare are taken into account.

Get free debt advice first

It’s worth looking at all your options before you take on more borrowing.

Get in touch for confidential, practical and impartial debt advice and we can discuss which ones are open to you.