Enterprise Finance’s Harry Landy discusses changes to the specialist lending market and new business opportunities for intermediaries
Q: How has the second charge mortgage market developed over recent years?
A: We are in a significantly different marketplace compared with a decade ago. Back then, secured lending was much more around adverse credit. You had much higher LTVs – up to 120-130% – and greater availability of sub-prime products. There were what we called “any, any” products, where the applicant could have unlimited CCJs and mortgage arrears, and still get accepted. We’re a world away from that now. The vast majority of borrowers we deal with today are essentially prime.
In 2007 second charge lending accounted for £7bn in a mortgage market worth £360bn. However, once the credit crunch took hold a lot of lenders had their funding pulled and the number of products available reduced substantially, and especially for bad credit.
By 2010, the second charge mortgage market bottomed-out around £350m, but it has grown steadily from there. Over the past 5 or 6 years we have seen new lenders emerge, with new products, ideas and criteria. But what has been really pleasing to see is that we have not gone back to those high LTV, high adverse products. The re-adjustment in 2009-10 has substantially improved the credit profiles of customers we are dealing with.
Q: What would your message be to those advisers who have perhaps tended to avoid second-charge mortgages?
A: It is completely understandable that they may have had misgivings, based on what happened in the past. The second charge mortgage market probably still has a perception attached to it that it is for low income, poor credit customers, and having high fees charged. However, it is crucial to understand that the market has changed for the better since then. This has been helped in no small part by the changes to the Mortgage Credit Directive in March of this year, which means that second-charge mortgages are regulated in the same way as first-charges are. That added to our reputation in a way that we would not have imagined 10 years ago. It’s stepping into the mainstream.
According to the Enterprise Finance Second Charge Report – what was the Secured Loan Index until recently – looking at the types of people using second charges, we are seeing average loan sizes of £56,000 behind an average first-charge of around £265,000. With an average LTV of 56-61%, this tells us that these are prime customers who, for a multitude of reasons, decide a second-charge mortgage is more appropriate for them than remortgage or further advance options. That is really encouraging as it shows that we are now dealing with good quality borrowers, which should be reassuring for advisers. Moreover, it confirms that second charge mortgages are a useful alternative for advisers to consider when evaluating options for their prime clients.