By Marie Grundy, Managing Director Second Charge Mortgages, West One Loans
Is the second charge market going to see a significant rise in the next year or so? What factors might drive this?
The outlook for the market is extremely positive, and I full expect 2022 to be the best year for second charge lending. Not only post-Credit Crunch, but, more significantly, post-Mortgage and Credit Directive (MCD) when it became a level regulatory playing field between first and second charges.
At West One, demand for second charge lending is at its highest since our launch in 2017, and we are on course to deliver record levels of enquiries and completions by the end of Q1. There are a number of factors driving growth in this sector.
UK households are facing the tightest squeeze on disposable income for a generation as a result of higher living costs. Rising energy prices are set to cost millions of households on average an extra £693 this year, alongside rising oil and food prices.
The Monetary Policy Committee (MPC) has increased interest rates for the third month in a row, and increasing numbers of borrowers are looking to reassess their finances to identify savings. Debt consolidation could offset the cost-living increase by maximising available income which, in the right circumstances, can be supported by a second charge mortgage.
The take up of five-year fixed rates has increased by more than 50 per cent in the past four years, with just under half of UK borrowers now benefiting, according to UK Finance, compared to three in 10 in 2017. Borrowers looking to raise additional finance during the term could be faced with hefty early repayment charges (ERC), so they don't disturb their first charge mortgage.
Now that the cost of fixed-rate borrowing is increasing, we expect to see this drive further demand for second charges, as remortgaging could mean sacrificing an existing deal for a higher rate of interest.
Product transfers are growing in popularity, and in some instances are outstripping mortgage activity. The ease of process and levelling of pricing for new and existing borrowers means that these are an attractive option, particularly for borrowers whose circumstances may have changed since they took out their mortgage.
It is significant that product transfers are switched on a like-for-like basis, often as an execution-only transaction, which means that additional borrowing needs are not catered for.
Second charges lend themselves well to this scenario and can provide a cost-effective solution for borrowers who are looking to raise capital during the mortgage term.
Home improvements are always very popular for second charge borrowing, and the lockdowns have led to a new wave of homeowners looking to improve their property and increase living space.
This is further fuelled by the shortage of housing stock, which may mean some potential purchasers are opting to make improvements rather than move. Second charges can often offer speedier completions without the requirement for conveyancing as part of the completion process, which takes away the lengthy delays often experienced when dealing with panel conveyancers. We are also seeing increased demand for the purchase of second homes to use either as holiday homes or as investment properties. Second charges can be used to raise a deposit or raise the fund toward an outright purchase.
Do we need greater education around the value of these products and when they can be used?
There is still plenty of work to be done to encourage more intermediaries to consider second charges alongside the options of remortgage and further advances. Often a stereotypical view of second mortgages exists - that it is only appropriate for borrowers with an impaired credit history - but this simply isn't the case. The majority of loans we now originate at West One follow a high street lender with good to excellent credit scores, so our experience is that borrowers are coming to us because it is the most appropriate advice option, and not because it is their only option.
Most major clubs and networks have arrangements in place for their members to access second charge products by either outsourcing the advice to a specialist broker or advising themselves, meaning most intermediaries have the ability to widen their product reach and offer an extended range of any client retention strategy.
Second charge lenders are very focused on increasing intermediaries' awareness of the benefits of this type of borrowing, with a number of initiatives being developed by various industry representatives.
I would love to see key mortgage distributors really promote the benefits of second charges to their members, which would endorse the work we are doing as an industry.
A bigger gap is consumer awareness, now that regular TV campaigns and newspaper advertisements are no longer a feature of second charge lending. As an industry, we have to try to find a way to highlight to borrowers directly the benefits of considering a second charge mortgage.
What is the role of seconds in the buy-to-let market?
We offer a range of buy-to-let second charge products to cater for the borrowing needs of both part-time and professional landlords.
Typically, landlords come to us to raise capital to improve their property portfolio to maximise rental yield, or use the funds to extend their property portfolio by raising either the deposit or the total funds required toward a new purchase.
buy-to-let second charges can also be used for most legal purposes, including personal use.
As an example, we recently had a case that was used to raise funds on a buy-to-let security to extend the lease on a main residence.
The opportunities really exist for landlords who have taken out a longer-term fixed-rate buy-to-let mortgage or where they are benefitting from a low tracker product with an inactive lender.
There is also reduced availability of further advances within the buy-to-let mortgage market, so second mortgages do offer valuable options for landlords looking to raise additional funds.
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