After years of being known as first charge mortgages’ slightly less attractive cousin, second charge is starting to come into its own.
With a slew of lenders offering lower rates and the majority of master brokers charging lower fees, today’s second charge borrower has access to a very real alternative to a remortgage or further advance.
Indeed, second charges are having something of a renaissance. The renewed and growing interest from the intermediary market — arguably prompted in March 2016 when the European Mortgage Credit Directive came into force — can be demonstrated by significant growth in both second charge loan volume and value during the past quarter.
Figures recently released by the Finance & Leasing Association reveal that second charge mortgage business increased in May by 26 per cent in value and 29 per cent in volume, compared with the same month in 2016.
What is more, consumers are beginning to gain awareness of the second charge option and to understand how it can assist them.
All of that said, a gap in understanding lingers, with a recent survey showing that many brokers and consumers remained either unaware or cautious of the sector.
For lenders and packagers, more work is needed in terms of the provision of education.
Second charge mortgages are not necessarily the best option for every client wishing to capital raise. Typically, they prove useful for clients who are:
- Tied into a fixed mortgage with restrictive early repayment charges
- Benefiting from an existing low mortgage rate
- Being offered a further advance with a higher rate
- Currently on an interest-only mortgage product
- Being declined on affordability for capital raising
- Wishing to capital raise for business purposes, including deposits for buy-to-let mortgages
- Recently self-employed or contract workers; or
- Recently retired.
Second charges also offer criteria advantages, such as higher loan-to-value borrowing, ERC-free or low-ERC loans, and lending to borrowers with complex income or multiple sources of income, or those with adverse credit.
The length of time it typically takes to arrange a mainstream first charge mortgage, remortgage or further advance can prove frustrating for those looking to raise capital quickly. Some lenders have a service level agreement of up to nine business days just to respond to an email.
Many second charge lenders have SLAs of 24 hours or less to respond to all enquiries. With this dynamic attitude to customer service, the time savings appear obvious. Second charges really do steal the march on other solutions.
There is more good news from the FLA, which recently reported a fall in second charge mortgage repossessions. As a percentage of average outstanding loans, these stood at 0.06 per cent at the end of Q2 — a 10 per cent reduction from 0.08 per cent at the end of Q2 2016.
Rates and fees are also hitting impressive lows. Lenders in the sector continue to reduce interest rates, which currently start at 3.73 per cent.
There are also a number of attractive exclusive, semi-exclusive and restricted panel products available through specialist packagers.
Although these do not challenge mainstream first charge mortgage rates, when considering the overall client scenario and costs, second charges can provide a viable alternative.
New lenders intend to enter the market over the coming months, the biggest of which is due to launch in Q4 this year. So we expect the second charge product choice to grow.
On 30 September new PRA rules come into force. We are keen to find out if the mainstream lenders that withdrew from the buy-to-let second charge market will return — and, if so, what their propositions will look like.
We would like interest rates to continue to fall and new incentives, such as free valuations, to be launched. It is the job of packagers with distribution power to negotiate more of these customer-friendly incentives.
Anna Bennett is marketing director of Positive Lending