The numbers will soon show that the second charge market is booming

   Paul Huxter - Head of Clubs and Networks

The American investment author Ron DeLegge II is credited with once saying: "99% of statistics only tell 49% of the story 100% of the time."

That witty warning against rushing to conclusions when analysing numbers came to mind when I saw the second charge lending figures for 2023.

Looking at the year as a whole, new business volumes were down 11% compared with 2022, according to the Finance & Leasing Association. From this top-line figure, you could easily conclude that this was a market in the doldrums and that demand had fallen off a cliff.

But that single figure masks the fact that activity has actually picked up over the past few months. Dig a little deeper and you'll find that the number of the new agreements was up 3% in December, which is traditionally a quiet month for the sector.

In fact, the outlook for seconds is looking extremely positive, with the market set for a significant uplift in demand during 2024.

There are many factors which suggest that December's uptick in lending won't be the last we see over the coming 12 months. So, what are those factors? For me, the biggest factor has been the incredible rise in product transfers (PT), which accounted for nine in 10 refinance cases last year, according to UK Finance. 

That's perhaps unsurprising, given the fact that higher interest rates have hit household finances and are causing affordability issues.

There is also a feeling among brokers that some high street lenders are reversing on criteria and tightening score cards. 

Therefore, for many borrowers a PT, which has fewer affordability hoops to jump through, perhaps makes more sense than a remortgage. In fact, it may be their only option in some cases.

We're also seeing better understanding about benefits of second charge loans among brokers and borrowers. They are starting to realise that second charge loans are often the most appropriate option for high street borrowers locked into deals but who want to raise capital.

That's because, with a second charge, you can do so without disturbing your first charge, which is particularly important for borrowers locked into competitive rates.

Often there is a misconception surrounding seconds that they are only suitable for borrowers with less than a perfect credit history. However, in reality, the vast majority of borrowers who take out a second charge with us are high street borrowers with good to excellent credit scores.

That said, borrowers with more complex borrowing requirements may also benefit from having second charges as an option with lenders in this space offering a more individual approach to underwriting, working closely with intermediary partners to find lending solutions.

That's all good and well, but if you're a broker who hasn't advised on second charge loans before, where do you start?

If you are directly authorised, you will have the option to provide the advice or to outsource this to a specialist second charge advice firm. The exception to this is if you describe your services as whole-of-market, in which case you will be required to advise the client directly.

Even if you are directly advising the client on their first charge loan, you can still outsource the processing of the second mortgage to a packaging partner. 

When choosing a specialist second charge broker firm to work with, make sure they have a whole-of-market offering so they explore all available offers for your client. 

If you are an appointed representative, it is likely that your network will have a process for you to follow. For example, it might be mandatory that you refer the case to an approved packaging partner. 

If you want to identify borrowers who may benefit from the option of a second charge, it's worth contacting any client on your books that has taken out a PT in the past two years. There is a strong change they will have additional borrowing requirements but they may have assumed that they had no options available to them because they opted for a PT.

Pts will remain extremely popular this year, therefore we expect demand for second charge loans will remain very strong. 

Therefore, this is the perfect time to introduce a new revenue stream into your business and to demonstrate your value to your clients.