A healthy outlook for the second charge sector

By Marie Grundy, Managing Director, Second Charge Mortgages, West One Loans

Before the Covid pandemic took hold, the second charge mortgage market was growing at a strong and steady pace with record sales.

For 19 consecutive months up until March 2020, new business volumes saw double-digit percentage year-on-year growth each month.

Like all mortgage lending, second charge dropped dramatically in April 2020 as the first lockdown paid a heavy price on people’s ability to borrow.

To put it into context, the peak month for new lending was October 2019 with 2,657 new loans issued to the value of £118m. This fell to a low in May 2020 of 486 new loans valued at £21m, according to the Finance & Leasing Association (FLA).

After this, monthly lending rose but dropped slightly in the traditionally slow months of December 2020 and January 2021.

The latest figures are for May 2021 and show new business volumes up by 12% in the first five months of this year. There were 1,910 new loans issued in May worth £84m.

We have seen business steadily rising since the end of the first lockdown and June 2021 was a bumper month for us. I expect the next FLA figures to be higher, reflecting our own experience.

Different types of borrowers

It has been an interesting few months and we are seeing different types of borrowers coming through, as people’s needs have changed due to the pandemic.

Debt consolidation has always played a key a part in the second charge market and that is still very much the case.

But a new dynamic, and a definite consequence of the pandemic, is the desire for people to have homes they can both comfortably live and work in. We have therefore seen a rise in people wanting to make home improvements and take out larger loans to pay for extensions to accommodate an extra room, for example.

Bank of Mum and Dad

The influence of the stamp duty holiday on the housing market did not directly impact on second charge mortgages as they are not reliant on property transactions.

However, we did see a correlation as more parents were taking a second charge to gift money to their children. The main use for this money was for a deposit to help them get onto the property ladder and try to beat the stamp duty holiday deadline.

The money can also contribute towards a larger deposit to either bring down the LTV and therefore the rate or to afford a bigger home. Many parents would rather help their children now than make them wait for inheritance.

Rise in product transfers

I expect there will be less movement in the purchase market over the next few months now that the main stamp duty holiday is over. What we will see more of is remortgaging and product transfers (PT).

This is a great opportunity for brokers to save their clients’ money by considering a second charge mortgage. The PT market has been feeding into the rise of second charge lending, particularly if people want additional borrowing.

Staying with an existing lender on a good rate makes sense but if the borrower requires more money, the rate may increase. If they are on an interest-only mortgage they would likely have to move to a capital and repayment with the subsequent large rise in monthly payments.

Popularity of five-year fixed rates

Brokers should also be on the lookout for their clients who are on five-year fixed rates and want additional borrowing.

Five-year fixes are the most popular mortgage right now so if people do want to remortgage to raise more money, they will have to pay redemption penalties. An alternative that brokers could offer their clients is to keep the five-year fix and raise the required amount with a second charge mortgage.

There is also the benefit with second charge lending that the funds will be released quickly as there is usually no requirement for the borrower to appoint separate legal representation and desktop valuations can sometimes be accepted in lieu of a physical valuation.

Going forward I see a very healthy second charge market emerging and it wouldn’t surprise me to see double-digit percentage growth on a regular basis very soon.

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