Increased lender competition is driving product development forward.
Steady progress is the theme of the day in the second charge mortgage market. We are not seeing spectacular innovation or business growth but we are seeing signs of sustainable development. It is becoming more and more of an attractive alternative to the first charge market.
Lender competition is increasing, which is driving product development. For example, we have recently seen UTB increase maximum loan sizes and West One launch in Scotland. A number of lenders are also introducing new fixed rate loans with no early repayment charges.
Service is another area in which competition is hotting up, with more lenders introducing automated valuation models instead of the full valuation or drive-by valuation that had previously been required.
As part of FCA regulation, income verification has become more rigorous, so lenders are focusing on improving other parts of the process to ensure overall service levels are not impacted.
And, of course, with greater competition comes lower rates. At the time of writing, the lowest published rate for a second charge loan is 3.65 per cent, which is comparable with some first charge mortgages.
Realistically, it is unlikely rates can be driven much lower but, at current levels, second charge loans provide an attractive solution for clients in a number of situations. Here are some of the most common at the moment:
Borrower on a low legacy rate
There are many borrowers on a lifetime tracker or variable rate so low they would be unable to match their current rate by remortgaging. For clients in this situation who want to raise extra money from their property, it can sometimes be more cost effective to use a second charge loan to borrow rather than shift the entire balance onto a more expensive rate.
Borrower on an interest-only mortgage
We also encounter clients on an interest-only mortgage who, if they were to remortgage, would need to shift to capital repayment. A second charge loan can enable borrowers in this situation to borrow money on their home and keep their existing mortgage in place.
Some first charge lenders have lost their appetite for debt consolidation and we are currently seeing a lot of demand for second charges in this area, particularly given rates are so competitive. It is so easy to run-up unsecured credit nowadays and we have worked with a lot of people who are near breaking point because of the strain of meeting the monthly payments.
By moving the balances onto a cheaper second charge loan, borrowers can immediately relieve some of the strain while they work towards a long-term solution to manage their debts. But always remember to talk to clients about the considerations involved in moving unsecured debt to secured debt.
Second charge lending has always been a popular choice for people carrying out home improvements. Where the improvements are likely to result in a significant increase in the house price, it can be beneficial to take a second charge loan to pay for the work and then remortgage at the higher property value and, therefore, a lower loan-to-value. This approach could help a client to benefit from a lower first charge mortgage rate in the long term.
It is possible to use a second charge loan to raise funds to pay a tax bill. A lender will generally want to know why the client did not have provision to pay the bill and that they are in a position to pay future bills.
Raising funds to buy another property
With stress test limitations on buy-to-let mortgages, we are seeing clients accessing larger chunks of equity in their residential property with a second charge loan to put down a bigger deposit.
Here is an excellent example we have seen lately of a second charge loan providing a simple solution to a complex problem.
The clients had purchased a council house on the Right to Buy scheme, borrowing a little more to renovate the property. Unfortunately, their builder messed them around; costs ran out of hand and the builder left with the project unfinished.
The couple had spent their contingency budget on the unfinished work, borrowed on credit cards and purchased a kitchen on a buy-now-pay-later basis. The cumulative effect of these circumstances was that their finances were stretched each month, even before payments were due on the kitchen, and the house was not in an adequate state to secure an appropriate remortgage. Any solution also needed to consider the property was purchased using the Right to Buy scheme and still within the pre-emption period.
The clients had originally investigated an unsecured loan as the rates seemed attractive but, as the balance was paid off over a relatively short term, the monthly repayments put further strain on cashflow.
It made sense for the couple to take a second charge loan, spread over a 25-year term, to keep the monthly costs low. This could ease the immediate strain on cashflow and provide funds to pay off the credit card, kitchen and complete the building work. Once the couple had completed the home they set out to build, they could then remortgage to pay off the second charge loan and switch the debt onto a lower interest rate over the long term.
Darren Perry is head of second charge mortgages at Brightstar Financial