Latest Finance & Leasing Association (FLA) numbers show that, in the year to December 2022, the number of new second charge agreements rose by almost a third (31%), and the value of those agreements increased by 40%, also on an annual basis.
However, the report says December was the first month for which the sector had reported a monthly fall in new agreements — by 3% — since March 2021.
Meanwhile, Loans Warehouse reports that the total amount of second charge lending in 2022 was £1.71bn, which is a 45% increase from the year before.
We’ve seen an increase in enquiries in the residential space because of borrowers’ inability to raise funds with their existing lender
Although, according to FLA director of consumer and mortgage finance and inclusion Fiona Hoyle, “lockdown in 2020 affected new business across all markets, so some of the growth will be delayed demand”, many people Mortgage Strategy spoke to are preparing for a long-term rise in second charge lending — in both the residential and buy-to-let (BTL) markets.
For example, John Charcol mortgage technical manager Nicholas Mendes says his firm has seen an increase in second charge enquiries in the residential space because of “the inability to raise [funds] with their existing lender, and the cost to break a fixed rate to move onto a higher rate isn’t financially cost-effective”.
He adds: “Likewise, for landlords looking to raise with their existing lender, and being tied into a fixed rate, second charges have been a great way to raise for upcoming energy performance certificate changes.”
We like to remind our clients that this is not a bridging loan product, where a loan should be replaced shortly after its activation
Private Finance technical director Chris Sykes says, although he hasn’t seen a “huge amount of traffic in this area yet”, and “a lot of clients won’t even know what we mean by a first and second charge”, Private Finance does expect the market to grow over the next three to four years.
He points out that, “in a downward interest rate environment… often if we were app-roached for additional borrowing it could have made more sense to remortgage to a new lender, paying early redemption charges, as there was a saving to be made in going to a new provider.
“Now, people want to do whatever they can to hold on to their 1% to 2% mortgage products. We should therefore see growth in this sector in the next three years or so while people, for example, still have a five-year fix at a low rate.”
One of the challenges we can come up against from an underwriting perspective is getting clear consent from first charge lenders
And Positive Lending chief executive Paul McGonigle says 2023, so far, has shown “exponential growth” in second charge lending.
“That is unsurprising due to spiralling unsecured credit debt, the affordability squeeze through the cost-of-living crisis and the clients looking to capital raise for home improvements rather than move,” he adds.
From the lender perspective, West One Loans managing director Marie Grundy says she expects to see growth in second charge lending because “it provides a solution for homeowners needing to access additional borrowing during the life of their loan, which would not be addressed as part of the product transfer process”, the latter being something she expects will increase over the next few years because of the affordability compression evident in remortgages.
People want to do whatever they can to hold on to their 1% to 2% mortgage products
With it being likely that more second charge business will be written, we thought it pertinent to ask Grundy what issues brokers should be mindful of.
“One of the challenges we can come up against from an underwriting perspective is getting clear consent from first charge lenders — particularly for landlords,” she reports.
Grundy explains: “There are some that make it quite prohibitive for borrowers to access additional finance, particularly specialist or inactive lenders that don’t offer further lending. In some cases, lenders will apply onerous conditions within the terms of consent that risk preventing borrowers from accessing a second charge loan.”
Second charges have been a great way to raise funds for upcoming energy performance certificate changes
For brokers, McGonigle says all warnings he gives to clients are specific to their circumstances — but there are standard caveats he extends.
“The most common risk warnings reflect clients taking unsecured borrowing and securing it on their home, or borrowing up to or close to their house value, which at the moment is particularly poignant when the market anticipates a slight softening in house prices.
“We also like to remind our clients that this is not a bridging loan product, where a loan should be replaced shortly after its activation due to fees that may be loaded onto it.”
On the subject of risk, Grundy says this year 1.8 million borrowers will come to the end of their fixed rate, with a large proportion of these seeing significant rate increases.
The most common risk warnings reflect clients taking unsecured borrowing and securing it on their home
“Second charge lenders therefore need to be very mindful of payment shocks on first charge loans, and ensure this is factored in to any affordability assessments,” she warns.
“There is also still a lot of economic uncertainty for lenders to manage. It’s not yet clear what will happen to house prices and it is widely expected that the UK is likely to enter a recession this year. So lenders will be factoring this in to their credit risk approach to ensure we are being prudent in our lending decisions.”
This article featured in the March 2023 edition of MS.
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