Experts discuss trends in the second charge market
The second charge mortgage market is in an interesting space at the moment.
Looking at the sector as a whole, experts believe it is evident that uncertainties around the economy are having an impact.
The latest data from the Finance & Leasing Association (FLA), for example, shows that in April the number and value of new second charge deals dropped by around a fifth, compared with April 2022.
That said, it is notable that when looking at the 12 months to April, the value of new deals is up by 18% on the previous 12 months, while the number of new deals has risen by more than 10%.
Mortgage Introducer has spoken with several experts in the field to uncover market trends, the buoyancy of second charge, as well as challenges and expectations of the sector.
Market trends
Mike Walters (pictured), sales director at Admiral Money, said the reality was that the rising interest rate environment at present was contributing to the figures reported by the FLA.
“There are some speculative borrowers who might have been tempted to tap into the opportunities offered by second charge mortgages, but who may be a little more wary at present, given those rate increases,” Walters said.
However, he believed it was important to recognise that while some of those speculative borrowers might be pausing their plans, there were nonetheless significant numbers of prospective clients for whom a second charge mortgage was a rather more pressing requirement.
Walters said there were plenty of homeowners who were looking to carry out some sort of home improvements to ensure their property better met their needs.
These needs might vary from, Walters said, a growing family, or a dedicated work space within the home, following the rise of hybrid working.
“In different circumstances, they might have looked to move to a larger property, particularly when house prices appeared to be softening, yet the rising rates on first charge mortgages have prevented such a shift,” he said.
For these clients, Walters said, a second charge mortgage was now the go to option, allowing them to continue to benefit from their existing low rate on their first charge mortgage, while also raising the funds they needed to carry out those required improvements.
Another area in which there was greater interest was among those homeowners who faced other unexpected or rising costs.
“We are still in the midst of a high inflation period, with homeowners across the country facing rising bills on virtually everything; tapping into their housing equity through a second charge mortgage can be a very sensible option, and allow them to get their finances under greater control,” he said.
There were also those with outstanding debts, and Walters said second charge mortgages could be used to consolidate those debts into a single loan, and free up some disposable income in the budgets.
He believed this was particularly important given the variances in interest rates with unsecured loans, compared with the secured nature of second charge mortgages.
“That is a trend we are likely to see continue across the rest of the year and beyond; homeowners are not going to choose to remortgage unless their term is coming to an end, but that does not mean they will not face the need for raising funds,” Walters said.
Daniel Yeo, chief executive of Specialist Finance Centre, said people were clearly feeling the pinch from increases in the cost-of-living as well as continued mortgage rate rises.
As such, he had seen a greater number of clients with adverse credit, specifically unsecured arrears and missed mortgage payments. In addition, Yeo said clients were noticeably more nervous and cautious about their finances.
“From a product perspective, a greater number of two-year fixed rates are being arranged at the present time as there is a widespread belief that it should be a good time to review rates in two years as opposed to five,” Yeo said.
Meanwhile, Yeo said hire purchase and lease agreements on cars were proving tricky from an affordability point of view.
Maeve Ward, director of commercial operations at Central Trust, said the cost-of-living crisis and continually rising costs of borrowing were currently the main drivers for the use of second charge mortgages.
“Unsecured debts such as credit cards and personal loans have become significantly more expensive to service, and many borrowers have found themselves in a position where they are struggling to make ends meet,” she added.
Buoyant market
Ward said the second charge market was pretty resilient right now largely due to demand, and also because second charge lenders had not frantically withdrawn products as we have seen in the mainstream residential and buy-to-let mortgage markets.
“Borrowers looking to extract equity from their properties are finding that the remortgage route is a pretty costly one, and so are using second charges instead, whether to restructure their finances, finance home improvements or for other reasons,” she said.
Yeo concurred that the second charge market was fairly buoyant at present and added that many mortgage brokers had realised that a product transfer and second charge worked very well alongside each other.
“In other words, move the first charge rate onto a new deal with the same lender and clear off the unsecured with a second charge,” he added.
It was not quite a ‘rescue mission’, Yeo said, but it was certainly a ‘clear up’ exercise for a lot of people who could see further increases in their household expenses on the horizon.
Challenges
Ward said affordability was a growing issue, making it harder for brokers to get a remortgage accepted for their clients.
“Credit impairment is also on the rise, even when the individual may be a victim of circumstance, where the issue was a credit ‘blip’ as opposed to an ongoing and more serious debt problem,” she said.
As lenders applied a more ‘common sense approach in the specialist market’, Ward believed they were best placed to serve affected borrowers.
When a remortgage was proving difficult, Ward said, brokers needed to look more holistically at alternative solutions to best serve their customers.
Yeo said that for obvious reasons, affordability was the dominant issue that was being dealt with at the moment.
“I do fear that clients will leave it too late to qualify for a second charge by building up too much adverse credit; marketing of the product is key to preventing this from happening,” he added.
Expectations
Yeo said he expected the second charge market to take advantage of the shifting demographic, as clients were ‘screaming out’ for second charges.
“If lenders maintain their appetite for new business, then firms operating in the space and their introducer bases need to market the benefits of second charges to their client banks,” he said.
Rather than wait for clients to reach out, Yeo said the market needed to actively let customers know that the solution was out there.
“I am not expecting the second half of 2023 to be much different from the first six months, to be frank,” said Ward.
All market expectations, Ward said, were of further interest rate rises, which might see consumer demand soften as they tightened their belts and so placed aspirational borrowing on hold.
What market trends have you witnessed in the second charge sector? Let us know in the comment section below.
