Why it’s time to incorporate second charges into your business model
By Marie Grundy, Managing Director Second Charge, West One Loans
There’s no doubt that the second charge mortgage market is a high-growth sector, with the latest Finance & Leasing Association data revealing members increased lending 83% to £1.3bn in the year to April.
At West One we have experienced unprecedented demand for second charge loans over the last 12 months with brokers also reporting their highest level of growth for second mortgages for many years.
Whilst it is clear that there is strong demand for seconds, the first-charge market is still significantly larger, topping £300bn of lending last year, according to UK Finance.
Realistically, the second charge space will never be anywhere near as large as the first-charge market, but there is huge potential for seconds to represent a higher percentage of overall UK mortgage lending.
In my experience, the main thing holding back the second charge market is misconception. While many brokers understand the benefits of a second charge loan, a lot still believe – wrongly – that these loans are just for borrowers with poor credit histories.
That may have been the case in the past, but it’s certainly not the case now. In fact, at West One, the vast majority of our borrowers have a first-charge loan with a High Street Lender, proving that they are indeed creditworthy.
Other brokers wrongly believe that second charge mortgages are more difficult to place or that the rates are uncompetitive when compared to a remortgage. Again, this isn’t the case.
Regardless what reservations some brokers may hold about second charges, there are three good reasons why I think they can no longer afford to ignore them.
Reason one:the shift to long-term fixed rates
Longer-term fixed rates have exploded in popularity over the past year as many borrowers are worried about the future path of mortgage rates.
We have already seen a significant leap in mortgage rates over the past few months, so it is understandable that borrowers would want the peace-of-mind a long-term fix offers.
However, if significant numbers of borrowers start flocking towards five seven or 10-year fixed rates, that creates a challenge for brokers whose business models rely on repeat business from existing customers every two or five years.
Regardless of how long a borrower locks in their rate for, though, many of them will still want to release equity from their property at some point during their fixed rate period.
If you don’t offer second charge mortgages, where will these borrowers go? There is a good chance they will utilise the services of an alternative broker who offer a wider range of products or apply via a comparison site who have affiliate partnerships with various broker firms only too willing to cross sell to your client.
Therefore, incorporating seconds into your business model will not only ensure that you offer a more holistic advice service but it also increases the chances of you retaining that client relationship long-term.
Reason two: the remortgage conundrum
Product transfers (PTs) have surged in popularity in recent years. According to trade body UK Finance, PTs are expected to account for £276bn next year, up from £168bn in 2020.
There are a number of reasons why PTs are becoming more popular. Firstly, a PT is a much simpler transaction than a remortgage with usually little to no additional underwriting.
That has become increasingly important recently as first-charge service levels have dipped and remortgages have become a much more painful experience than they used to be.
However, while PTs are convenient, the main issue with them is that they rarely account for a borrower’s additional borrowing needs.
If you include seconds as part of your offering, you can secure your clients a good first-charge rate with minimal fuss, and also satisfy their need to raise further capital.
Reason three: the cost-of-living crisis
The UK is currently gripped in its worst cost-of-living crisis in decades, leaving millions of households worse off than they were.
With inflation tipped to hit 11% by October and interest rates expected to rise to 3% next year, the situation will only become worse.
One of the ways households will be looking to save money is by reviewing their levels of unsecured debts with an experienced adviser to explore if consolidating some or all of their debts into one lower, more manageable monthly repayment would be appropriate. This can make a positive difference in maximising monthly disposable income providing this constitutes the right advice for the borrowers individual circumstances.
Homeowners will become more reliant than ever on professional help as to how best to navigate their way through more challenging economic circumstances, and when it comes to mortgage advice, second charges could and should be part of that conversation.
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