"For those borrowers locked-in to competitive five-year deals but looking to raise funds, a second charge will be a possible option over the coming years."
For example, the second charge mortgage market has picked up pace significantly in recent months and June figures show lending totalled £143.3m during the month – a 37.41% increase on June 2021.
Although this figure marked a slight drop of 5.03% from May, Q2 as a whole saw the highest quarter for lending since 2007, according to the Loans Warehouse Secured Loan Index, of which Evolution Money is a contributor of data.
When this is broken down, we can see that ‘consolidation’ overtook ‘consolidation and home improvements’ to make up the bulk of lending in June.
Consolidation accounted for 41% of all loans, followed by consolidation and home improvements at 37.20% and home improvements alone at 15.57%.
Given the cost of living crisis and the increased cost in building materials, it is perhaps not surprising that we are seeing a cooldown in the home improvements market.
There are several other factors however that are leading to second charge’s overall popularity at the moment; some of which correlate with what we are seeing in the first charge market.
The first is the continued and historic popularity of five-year fixed rates. These products accounted for 63% of all remortgage activity in May, up nearly 10% from April, according to figures from supplier of conveyancing services, LMS. Many five-year fixes are now cheaper than their two-year counterparts.
This trend is likely to have contrasting effects on the first and second charge mortgage market moving forward.
It is plausible that the popularity of five-year fixes could have a detrimental effect on the remortgage market over the next few years, with borrowers waiting five years to remortgage instead of the past norm of two years.
It could however have the opposite effect on the second charge market. For those borrowers locked-in to competitive five-year deals but looking to raise funds, a second charge will be a possible option over the coming years.
The last few months have seen borrowers rush to lock into cheaper fixed-rate deals in anticipation of another Bank of England base rate rise.
Yorkshire Building Society has reported an 88% increase in the value of Early Repayment Charges (ERCs) paid so far this year, compared to the same period in 2020, with reports that some borrowers are so eager to leave their fixed rate they are paying ERCs of more than £6,000.
Borrowers looking to lock into five-year fixes will need to know from the outset that there are options open to them should they decide further down the line that they want to raise additional funds without disturbing their existing mortgage rate. This makes it vital mortgage advisers are knowledgeable about the second charge market.
We are also seeing some lenders in the first charge market take a more cautious approach to lending, perhaps due to fears over the cost of living and the impact this will have on a borrower’s affordability.
The latest Bank of England Credit Conditions Survey shows banks and building societies expect mortgage availability to decrease slightly over the period to the end of August. With some lenders in the first charge market not yet attuned to open banking and not offering a more personalised approach to borrowers’ finances, there could be borrowers who no longer fit a lender’s mould when they come to raise additional funds through a remortgage.
We could see such borrowers turn to the second charge market instead, where a lender might be able to utilise open banking and a more bespoke approach to find a solution.
We therefore expect demand for second charge loans to remain strong throughout the remainder of the year and it will be essential advisers can offer their clients holistic advice, covering not just one area of the mortgage market but across all, and particularly second charge mortgages.
