"Many borrowers who have previously not found themselves failing income multiples on first charge or remortgage applications are now finding themselves falling foul of restricted lending policies."
We started the year looking down the barrel of a range of negative economic indicators and we’re ending it with an Autumn Statement which has revealed we’re all going to pay more in tax. Inflation is running at 11% and experts say we’re looking at the greatest squeeze in living standards since the 1950s. Factor in the energy prices and the cost of living crisis and Christmas isn’t looking to be a happy prospect for many.
So, all things considered and you may be surprised by the latest lending statistics from the Finance & Leasing Association (FLA), which provides the most authoritative data for the second charge mortgage market. It reported that the second charge mortgage market returned another strong performance in September with further double-digit growth in new business by both value and volume.
According to the FLA, the distribution by purpose of loan in September showed 57% of new agreements were for the consolidation of existing loans, 15% for home improvements, and a further 22% for both loan consolidation and home improvements.
In the past, much of the heavy lifting in these areas would have been provided by the residential remortgage market. However, with the recent rises in Bank Rate over the past 12 months, from 0.1% in November 2021 to 3.0% a year later, it is inadvisable for borrowers with a low fixed rate on their mortgage to lose it by remortgaging to release equity. This is where a second charge can fit the bill. The client can keep the fixed rate mortgage and use a second charge against the property to raise funds for home improvement or debt consolidation for instance. Even if the fixed rate on the current first mortgage isn’t particularly competitive, the client could face punitive Early Repayment Charges (ERCs) which makes the second charge again a more attractive option.
Another instance where a second charge could be the right product for the borrower is where they either have arrears on their current first charge or existing unsecured credit. The second charge sector contains lenders who are in the credit repair business and will assess borrowers with varying degrees of adverse credit. Here, the client can use the second charge to pay off the arrears, keep up with their first (and second) charge mortgage payments and improve their credit rating until such time as they can remortgage with a high street lender and pay off the second charge. Credit repair continues to be a popular reason for second charges and will increasing pressure on people’s personal finances it is likely to become an ever more popular reason.
Equally, the tightening of criteria on first charge residential mortgages by the mainstream lenders has been a factor since Covid and has become more prevalent since the disastrous ‘mini Budget’ in the autumn. Many borrowers who have previously not found themselves failing income multiples on first charge or remortgage applications are now finding themselves falling foul of restricted lending policies. As discussed above, a number of second charge lenders will consider applicants who have been refused by the first charge market and can come to their aid.
Mortgage brokers will no doubt have heard that second charges should be considered when looking at a remortgage application but the fact is that many brokers simply ignore them as an option. This not only goes against the Mortgage Credit Directive of 2016 but also does a disservice to the client; they may well believe there is no option available to them because of their broker’s intransigence when they could improve their circumstances no end with a second charge.
At Specialist Finance Centre we deal with brokers of all experiences of second charges. We help those who have little or no experience through the process because, as a master broker and packager, we have relationships with the majority of second charge lenders, covering all the bases. With rates from 4.20%, loans from £10,000 to £500,000 and products that don’t work off income multiples, just an affordability assessment, we can help brokers find a solution that can make a real difference to their client, which does wonders for retention.
The growth of the second charge market does not surprise me and, as more brokers become educated about the product and see the value, it will only grow further.
