If second charge lending is to break the £1bn mark, product diversification and more investment in automation are vital
Second charge mortgage completions totalled £889m for the year ending 30 April 2017, which is a two percentage point increase from the previous year. Encouragingly, completions for April alone were £79m – 53 per cent higher than in April 2016.
The sector is pushing to break annual lending of £1bn for the first time since the recession. However, given the number of lenders in this space, I wonder if, even at that size, investment and development would be overlooked in favour of other products.
Pricing is easiest to change and it has fallen at all LTVs, with starting rates now at 3.74 per cent. Product diversification and more investment in automation are now needed.
Since the MCD, affordability checks have homogenised with those of first charges. Prior to this, a major advantage of second charge over further advance or remortgage was increased loan-to-income ratios. In retrospect, it seems daft for a second charge loan, normally with a higher interest rate, to be permitted at higher LTI ratios. But this was a result of softer regulation outside the FCA and the need to offer an advantage over the other options.
Further benefits remain, such as higher-LTV interest-only, lending with adverse credit, unusual property type and no or low early repayment charges, but these are relatively specialist in comparison.
In today’s market, second charges are chiefly preferred for their economic advantage over the short to medium term. Borrowers who would trigger an ERC or lose low interest rates in order to raise capital are better off taking a second charge, then refinancing either once the ERC ends, the current product expires or the Bank rate is expected to increase.
But the fact such lending is appropriate for those who unexpectedly need to raise capital means it will continue to be hampered. After all, most are financially organised or will find the purpose of the loan not urgent enough to warrant paying higher levels of interest.
If the market is to grow, it is important for any other areas of client saving to be explored. If second charge rates are higher than first charge rates for the same risk, seconds providers need to consider how to determine risk at a lower cost more quickly. More speed and less cost are achieved in one way only: automation.
Virtually all second charge lenders have embraced automation. Calculation of affordability has been hugely simplified and made more accurate with the use of ONS data, which can be tailored to region, family size and a host of other factors. This change has reduced the resources required for many parts of the chain, which has manifested itself within broker and packager fees.
Lenders have also lowered the overall cost to clients, but largely through reductions in interest rate rather than via product fees.
Underwriting of seconds revolves around income and security of property, currently assessed via a manual review of payslips, accounts, SA302s or an accountant’s reference and some form of valuation. While assessment of self-employed income remains a manual process, technology is being developed to verify consistent and regular bank credits from an employer.
Meanwhile, valuation fees are a large expense. Given so many incentives exist within first charge lending, seconds lenders must embrace solutions too. If second charge mortgages are to be more compelling, both rates and application costs must keep falling. Consumers are right to discount seconds where total application fees negate any potential interest rate saving.
It would be a different story if completion could take place within a week thanks to improved automation and no product fee, valuation fee or legal fee. In theory this is available today, but only for a small percentage of cases.
Increased lending could see providers being more inclined to shorten the interest rate gap with first charge, further improving comparison.
Chris Fairfax is managing director of Positive Lending