Since inception Positive Lending have been synonymous with second charge mortgages and continue to be a market leader in this sector so it only seemed fitting that we start the first in a new series of specialist lending debates on the topic of Second Charges. For this episode I’m delighted to welcome a panel of well known industry experts and friends who offer a wealth of experience and expertise to engage in discussions and share their insights on this sector and the anticipated landscape ahead for 2024.
The Panel
David Coleman, Head of Sales at Positive Lending
Maeve Ward, Industry Expert
James Briggs, Head of Intermediary Sales at Together
Caroline Mirakian, Sales & Marketing Director (Mortgages) at United Trust Bank
DC – Where to do you see the market going for second charge lending in 2024?
JB – During 2023 the seconds market was largely dominated by the requirement for borrowers to consolidate unsecured debt, partly driven by a new wave of buy now pay later borrowing, which are particularly popular with younger homeowners battling rising living costs. In total, Over the past 12 months the stock of consumer credit has risen by over 8.6%, with the bank of England research showing that households are more willing to take on unsecured debt. As a lender, we saw a reduction of non-debt consolidation, discretionary purposes such as Capital raising for home improvements, assisting family members onto the property ladder and BTL/holiday home investment. These discretionary purposes historically have fuelled larger loans in the market and now that the UK has returned to a level of stability in terms of BBR and inflation, we expect greater utilisation of seconds and larger average advances to return.
MW – I am confident that we about to enter a significant period of growth within the specialist market as whole of which Second charge mortgages will play a vital part in providing alternative lending solutions for many customers, be that on their main residential either as a second charge mortgage or a homeowner business loan or a second charge buy-to-let mortgage secured against an investment property. Product transfers are reported to be at an all time high, with many borrowers opting for a longer fixed for certainty of payment, these same borrowers however might also need to capital raise over the next few years and will be looking at alternative lending solutions that can help them achieve the outcome required whilst protecting any preferential mortgage rate or incurring a costly early redemption charge. A second charge mortgage should always be considered alongside re-mortgage in any capital raising scenario and could be the right outcome or the only outcome depending on the customers profile versus lender criteria.
CM – I am optimistic about 2024 and I can see a number of positives for the second charge market. Firstly, two new lenders joining the market demonstrates growing interest in seconds as a product which can provide solutions in circumstances where other mortgage products either can’t or are less suitable. It will also add further credibility to a market which has historically been seen as a product of last resort. Whilst the size of the market was reported to have contracted slightly last year, with, according to the FLA, overall lending down 11% versus 2022 figures, there were still just over 30,000 second charge completions in 2023. When we consider that overall economic and market conditions feel considerably more upbeat than say three months ago, I believe there will be a lot of consumers who may find a second charge to be an excellent solution to their borrowing needs this year. Seconds have been a really useful product when affordability has proved a challenge or where a customer wants to release some equity but not lose a great rate on their first charge by remortgaging or have an expensive ERC they’d rather avoid. Product transfers will remain prevalent in 2024, with limited consumer choice for funding home improvements or debt consolidation if they’re unwilling to look at a second charge.
DC – Product transfers aren’t currently an option for many second charge lenders, should they be?
CM – Yes. I think a PT should be an available option – The more choice and options a customer has, the better fit the solution will be.
JB – Together launched second charge PT option for borrowers in Q4 of 2023, which gives borrowers options to refix at a rate which is favourable to new business rates. Often clients take the opportunity to re-mortgage at the end of an initial fixed period, but where this is not possible we believe it’s important to support these clients with options.
DC – Is more education needed around seconds?
MW – Education is key to ensure that customers are presented with the right outcomes based on their circumstances. The more educated the advisor the more solutions presented to the borrower which can only be a good thing. Second charges for some still have the stigma of old associated with it however the perception versus the reality is very different. The mortgage landscape is not the same as it once was, customer profiles are vastly different to what they once were and there will be more borrowers in need of specialist finance than ever before. A second charge mortgage will be a life for many who need to repair and rebuild back onto the high street as well as those that need to simply restructure their refinances ahead of a re-mortgage, as well as those that are looking to expand but need an alternative way to do as their portfolio is highly geared or their mortgages are with those that will not consent but they have equity in their main residence which can be used for business purposes so an alternative way of raising the funds to achieve the same outcome. Second charge mortgages are a real alternative to a re-mortgage and mortgage advisors should if they haven’t already be looking to spot how they might be able to support their client banks because ultimately a customer will find a solution so best they find that solution with their advisor than risk losing their client from the client bank altogether.
CM – I think as an industry, brokers and lenders need to work together to find more ways of educating consumers about all the mortgage options available to them. I firmly believe that when many people look at comparison sites or speak to friends and family about their plans, second charges and secured loans tend to get something of a bad rap which may put them off looking further. Even some brokers are reluctant to consider them because of historic misconceptions, which is crazy given that the industry is unrecognisable to how it was 30 years ago, and brokers’ obligations under consumer duty. There are so many myths about them being expensive, complicated or in some way more risky than a first charge. We currently have second charge rates lower than some first charge products! As the sector continues to grow and mature, second charges are becoming an increasingly versatile option suitable for a wide variety of uses. Although the majority of second charge loans are still for home improvements, debt consolidation or a combination of the two, we are providing a growing number of customers with the funds for more unusual purposes such as releasing equity to invest in a second home or investment property, to pay school fees or to start a small business, for example. The second charge loan should definitely have a prominent place in a professional broker’s advice toolkit. If not, they’re probably turning away customers who could benefit from having one. Or worse, they may be guiding them towards an inferior solution.
JB – There is an ongoing need for more education around the benefits of Second charges. We have made great strides forward, since implementation of the Mortgage Credit Directive (which aligned the first and second charge processes and documentation), and our respected packager partners play an important role in promoting the opportunity. It’s important to offer a blend of learning options from webinars (which can reach a wide audience) to face to face training, so it’s great to see Positive Lending investing in a dedicated ‘on the road’ team.
DC – Rates continue to lower in the world of mainstream mortgages but will we see rates further reduce in the second charge world?
CM – We are already seeing something of a rate war as lenders compete for a bigger share of a smaller market. Swap rates have come down and when the Bank of England reduces base rate (which it will at some point) mortgage rates will almost certainly come down even further and consumer confidence will get a boost. Although the rate of inflation crept up very slightly from 3.9% to 4%, and despite there being the possibility of further price pressures due to the problems facing shipping in the Red Sea, I don’t think we’ll see inflation creep back up to double figures.
JB – Rates in the second charge market are fairly dynamic and have been regularly changing in recent months. The majority of lenders in the second charge space are non-bank lenders funded via the capital markets, so the rates are dictated by the Swap pricing. We’re on a downward trend currently and hopefully this continues.
MW – Definitely. Rates have already started to fall and second charge rates are now back starting at 6.5%. Competition is a catalyst for further price reductions as lenders fight to protect share, so with two new lenders ready to launch this year I expect we will see further price drops, alongside a widening of risk appetite and investment in technology to ensure ease of processing, all of which are great for the market!
DC – We have already seen more adverse creeping into the market and this year will likely see more credit impaired clients struggling to capital raise, are lenders prepared for this?
CM – Sadly, yes, cost of living pressures and higher interest rates will almost certainly push more people into incurring some kind of credit default. However, this is an opportunity for the specialist market – for brokers and for specialist lenders. Brokers can guide customers with a credit blip or two towards suitable specialist lenders who can do what they do best; ignore tick boxes, look at credit histories in the round and make common sense underwriting decisions which allow otherwise strong customers to achieve their property ambitions. For example, UTB has a number of different mortgage products and second charge loans available which take into account different levels of adverse credit and may still be able to offer a solution which meets their needs. However, just as important is how we look after existing customers who are struggling to manage their finances in this higher interest rate, higher inflation environment. We, like all good responsible lenders, have various forbearance and support measures available to vulnerable customers and we subscribe to the Mortgage Charter.
MW – The specialist market is prepared and has been for sometime. We have heard lenders refer to certain borrowers as Victims of circumstances and after a global pandemic, and in the midst of a cost of living crisis this sentiment has never rung more true. Borrowers will have worked hard to ensure that they have kept payments up to date but through no fault of their own will have been dealt a hand which was otherwise outside of their control, perhaps they have lost their job, had their hours reduced in turn their earnings, bonus / overtime removed, or changed career for example employed to self employed all of which might have led to impairment but who’s circumstances now might now be vastly different and the position improved. Lenders that rely on score to base their lending decisions will see many customers underserved, thankfully in the specialist market many lenders do use score in isolation or do not use a score at all to make a lending decision which means there are solutions for those that might otherwise feel the door is closed as they have struggled or are starting to struggle but need to capital raise. This is where the specialist brokers shine as they are stronger than any sourcing system and alongside criteria platforms such as knowledge bank, they know which lenders will look more favourably, their criteria inside out & can help brokers new to the specialist market find alternative outcomes for their customers protecting both their income but also their client bank.
JB – Unsurprising, sourcing system data reveals that between Jan 23 and Nov 23 there was a 65% increase in adverse credit enquiries, the largest growth being in the County court judgement category. Historically the second charge market has offered solutions to these clients and this shows no signs of abating as the high street has little appetite for what remains a specialist market. At Together we have a range of products to support clients with adverse credit issues either current or historic.
DC – Can more be done to speed up the application process?
MW – Absolutely and technology plays a massive role, the key to success is to get the right balance so that the flexibility the specialist market is known for is not lost. There is nothing more valuable than the ability to talk to a decision maker about a customers personal circumstances, unique to them, it can be the difference between them being accepted or declined the latter often being the case when the decisions are based purely on algorithm & automation without understanding the story behind the customer which is where the human touch and personal underwrite is so valuable.
JB – Throughout 2023 Together improved the percentage of cases which fund via AVM (automated internet valuations) which saves valuable processing time and cost. There is further work to be done to automate the processes across the industry; however, we would not wish to compromise our common-sense underwriting process, for those clients who need a pragmatic underwriting approach.
CM – At UTB we’re always looking for ways to speed up our processes. In fact we have had considerable success, reducing our average application to offer time to just 20 days which is a full 7 days quicker compared to processing times in 2022. We have been able to deliver several industry firsts using great technology from innovators like Nivo to accelerate ID verification and document transfers. This year I think we’ll see more lenders go paperless, adopting secure electronic signatures for all stages of the process, and taking steps towards using electronic signatures on deeds. I also think there will be increased use of automated valuations, as well as a lot more second charge applications completing with no consent. However, we must balance speed with responsibility to the customer and be wary of accelerating the process to the point where offering a no consent option puts a customer’s first charge mortgage in breach.
To find out more about how Positive Lending can support your second charge mortgage clients,CLICK HERE to visit our Second Charge Mortgage Page