How will the second charge market develop?

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Supported by
Enterprise Finance
How will the second charge market develop?

A general lack of awareness of second charge lending, or second charge mortgages, among advisers and brokers means there is still plenty of scope for the market to develop in the coming months and years.

As evidenced in the first article in this special report, second charge lending took a hit at the beginning of the year, so pressure is on the industry to think of ways it can appeal to a wider market and increase its presence.

Perhaps one of the biggest challenges facing the second charge space is shaking off its image as an option of last resort for the financially dubious.

Mark Dyason, managing director at Thistle Finance, agrees: “The second charge market has a challenge to show that it is complementary to the first charge market, not where you end up as the last chance saloon. 

“Also it must demonstrate the costs of using [second charges] are not as high as previously [was the] standard and has the flexibility to deliver solutions for clients unavailable in the first charge market.”

There remains a risk that some intermediaries are sleepwalking into inappropriate product recommendations, simply because of the perception that second charges are expensive, so not worthy of consideration.Steve Harness

Certainly, second charge rates have come down significantly – where before they may have been closer to 12 per cent, now rates are being offered from 3.83 per cent.

He acknowledges: “New products appear all the time and many people would be surprised at the rates available to clients in second charges often being lower than some of the products at the top end of the near prime market.”

Lower for longer

This reputation for high, often double digit rates has held the market back from wider uptake.

Could this be about to change?

“As competition increases, lenders will become more flexible around criteria and a continued reduction in rates,” says Peter Williams, sales director at John Charcol.

Many argue the second charges space needs to change by continually lowering rates, or risk losing more market share.

Steve Harness, commercial director at The Loans Engine, observes: “As stubborn, ‘old school’ master brokers continue to offer intermediaries archaic high-fee solutions, the market is likely to stall and lenders will fight for market share on rate.” 

He insists what he calls “savvy mortgage intermediaries will clean up. 

“Not only will their clients benefit from this downward pressure on rate, they will deliver great value to their clients by choosing low fee models,” he explains.

“But there remains a risk that some intermediaries are sleepwalking into inappropriate product recommendations, simply because of the perception that second charges are expensive, so not worthy of consideration.”

His solution for continued expansion of the market relies on further involvement by the regulator.

Mr Harness suggests: “A positive solution could be for the regulator to expand the requirements of MCOB 4.4A.8A, and insist that intermediaries obtain a second charge quote on every capital raising remortgage to mitigate the possible risk of intermediaries recommending the wrong product. 

“What’s not to like about that? Disenfranchised intermediaries could be pleasantly surprised, and a move such as this could potentially deliver better customer outcomes, and grow the market.”

Shake it up

It’s hardly radical but it could be the shake-up the market needs. Perhaps it is a case of allowing the recent changes under the Mortgage Credit Directive (MCD) to sink in.

Maybe second charge lenders need time to absorb the regulatory changes and position themselves to capitalise.

As Andrew Fisher points out: “The industry has just gone through its biggest regulatory changes with the European Mortgage Credit Directive, so I don’t expect there to be any significant changes any time soon.”

He insists: “The second charge market is evolving and there are many new products coming to the marketplace as banks and lenders seek to differentiate themselves from their competitors.”

The MCD was a huge regulatory change. We don’t expect to see anything of that scale in the near future. The FCA has, however, said it is looking at unused permissions among advisers with a view to removing them if not used.Harry Landy

Harry Landy, managing director at Enterprise Group, believes there is more the regulator can and may do.

"The MCD was a huge regulatory change. We don’t expect to see anything of that scale in the near future. The FCA has, however, said it is looking at unused permissions among advisers with a view to removing them if not used," he points out.

"That’s likely to extend to reviewing the rush of second charge permissions (over 2,000) taken out at the time of MCD by the [approximately] 5,000 directly authorised brokers. So there may be some scrutiny from the FCA on why those permissions haven’t been used when brokers are obliged at least to consider second charges."

Aligning the regulation of first and second charge mortgages may not exactly hail a new era for this type of lending but as long as the industry is responsive, it could be the start of the steady growth of second charges.

Some companies may have been dragging their feet but others have been far quicker to respond.

Fiona Hoyle, head of consumer and mortgage finance at the Finance and Leasing Association (FLA), says: “Now first and second charge mortgages are regulated on the same basis, firms are unsurprisingly beginning to explore new product options. 

“Some firms have already extended their product range to include first charge mortgages and buy-to-let loans and there is also the potential to look at more bespoke services which customers would find useful, such as lending into retirement.”

Positive future

The emphasis is certainly on intermediaries to begin exploring second charge lending and considering it an option, rather than simply dismissing second charges as too expensive or as a very niche product.

There are plenty who are positive about the future of the market though, despite recent figures showing growth slowing.

Ryan McGrath, chief executive at The Loans Engine, is one such industry expert who sees the opportunity in the second charge market.

“We are noticing a real shift in the level of intermediary activity. Seconds are not what they used to be, and it’s clear intermediaries are starting to recognise this.”

He continues: “2017 is going to bring challenges and uncertainty for many but intermediaries now have a credible alternative finance option at their disposal, and are best placed to access the right solution to meet their clients’ needs.”

Mr Dyason adds: “Innovation is alive in second charges as well as healthy competition – we look forward to seeing the changes in this market over the next 12 to 18 months.”

eleanor.duncan@ft.com