MortgagesSep 20 2017

Second-charge mortgages market surge

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Second-charge mortgages market surge

The introduction of the mortgage credit directive (MCD) in March last year was a game changer in that it brought second-charge mortgages under the FCA’s mortgages and home finance: conduct of business (MCOB) rules.

Many believed it would provide a boost to the number of second charges written because of the rules requirements that effectively placed the products on the same playing field as first charges. At the very least, advisers would need to consider second charges alongside remortgages and further advances when dealing with clients who were looking to raise capital.

However, as many advisers will know only too well, up until that point the second-charge – or secured loan – market had been a very different one to first charges, with its own unique set of circumstances. Also, the master brokers in the sector had a somewhat different role. Up to that point they tended to dominate distribution of the products and run their own fee-charging structure that looked very different to the one offered by first-charge mortgage operators. 

There were several reasons for this, not least the fact that there tended to be a lot of fall-through second-charge cases, which required master brokers to pay up-front for client services that did not necessarily result in the case completing. This meant that, effectively, those customers who did complete were paying for those who did not and this resulted in large fees being charged.

It was a fee-charging system that was prevalent across the board and seemed to be a major reason why many first-charge advisers did not actively consider second charges. Add in the perception that seconds tend to be more expensive and have an image issue, with customers often being uncertain about how they work, and you can understand why the seconds market was still facing considerable challenges, especially with the move across to the new regulatory environment.

Affordability has also been a major factor brought about by MCD

So what has happened in the second-charge market since MCD came into force in March 2016? Well, master brokers still hold the balance of power when it comes to second-charge products, with many lenders continuing to distribute their offerings via this channel rather than giving access directly to advisers.

Interestingly, though, we have started to see master brokers change their fee structures, opting for flat fees at more recognisably first-charge levels, rather than the thousands of pounds some still charge. 

Affordability has also been a big factor brought about by MCD, given these rules are much more prescribed than the previous Consumer Credit Act days. Lenders have had to look to innovate when bringing new products to the market and some of these innovations revolving around criteria, such as multiple income sources and accepting zero hours contractors, reflect the changing workplace and the needs of today’s employed. 

To also assist with affordability, client ages at the outset are rising, which means certain lenders, including Precise Mortgages on its second-charge buy-to-let product range, are now lending to borrowers past their retirement.

Key points

  • Master brokers still hold the balance of power when it comes to second-charge products.
  • About nine lenders now offer products above the standard 75 per cent LTV.
  • The biggest test for any new lender is how innovative they can be with the product range.

Also, in many areas second-charge lenders can be more flexible than their first-charge counterparts, especially when it comes to adverse credit. There are lenders, such as Prestige Finance and the Together Group, that allow clients to apply with recent credit issues rather than historic problems, although most of these will need to have a justified circumstance or it will need to be linked to a life-changing event. 

On a general point, I would say that the second-charge market has seen its active lenders expand their product ranges rather than develop new initiatives. There are now some good choices in fixed-rate and discounted products including most recently 10-year fixed-rate deals. There are also products with no early repayment charges from day one, allowing more two-step processes – using a second charge to repair a credit file today with a remortgage to bring everything back together in a year or so.

About nine lenders now offer products above the standard 75 per cent LTV and on buy-to-let there is also a 90 per cent LTV second-charge product available. Talking of which, the buy-to-let market as we know it is going through a torrid time of regulatory changes and first-charge buy-to-let lenders want to protect their interests. The no-consent products from the likes of Evo Finance, Shawbrook Bank, Step One Finance and Equifinance provide a good solution for BTL clients where a first-charge lender will not provide consent for the charge to be placed. For landlords struggling to release equity due to stricter demands from a first-charge lender this provides a good alternative solution. 

In terms of interest rates charged – and a major positive point for the sector given the perception mentioned above that rates tend to be high – prices have been tumbling down since MCD. However, this is probably more to do with lender liquidity and pushing for market share than anything regulatory from the changes that were introduced.

There are now five lenders with rates under 5 per cent and a client could get a sub-4 per cent deal with the best rate being about 3.73 per cent. There is also a lender that prices for risk using a score-based system, which can give results of sub-3 per cent interest rates, although most of these deals are likely to be very low loan-to-value. 

The biggest test for any new lender wanting to operate in the second-charge market is how innovative they can be with the product range. As most of the products are there or thereabouts, entrants are going to find this particularly challenging.

Criteria is expansive and this is an area where potentially a new lender could gain some market share, but they will need to balance their risk with the requirements of the regulator. It is perhaps why we have not seen any entrants to the second-charge market post-MCD with United Trust Bank launching just prior to the regulation being implemented. There are about 18 lenders that now offer second-charge products. 

As referenced, the FCA wanted the second-charge market to have some parity with first charges and it is definitely clear that MCD has driven these two markets closer together. Whether there is the level of parity many second-charge stakeholders envisaged, however, is another matter entirely.

The changes we have seen have taken some time to bed in, and the initial post-MCD second-charge lending figures reflected that teething trouble. Now we are starting to see a return to growth – the latest Finance & Leasing Association lending figures for June were up by 33 per cent by value and 22 per cent by value on the previous month, while the number of products in the first six months of 2017 were 11 per cent higher on the same period in 2016. 

There does appear to be greater understanding of seconds and how they might fit certain client’s circumstances and one might expect that, as more advisers get to grips with the product and particularly how they might be used in the buy-to-let market, we might continue to see something of a resurgence in activity. 

Christine Newell is mortgages technical director at Paradigm Mortgage Services