It’s an age old question, but a fairly recent one for the new second charge mortgage market, argues Simon Mules, commercial director at Optimum Credit
Finance & Leasing Association (FLA) statistics reveal that for the first nine months of 2016, the total amount lent was £655m versus £759m for the same period in 2017. So it’s very clear that the 2016 number of £874m will be surpassed and the £1 billion number is within reach.
Those of us who are long in the tooth will, however, realise that size is not important. The regulation we adhere to drives us to ensure that the outcome for the customer is the key to success and ultimately is what will ensure the second charge mortgage market grows more substantially in the coming years. Second charge mortgages are becoming more popular for a number of reasons:
- Rates are competitive
- Products are innovative
- Advised sales process which is similar to first charge lending
- The demand for debt consolidation as well as home improvement loans
- Documents such as a mortgage Illustration which is similar to first charge lending
- Lenders’ speed of service which surpasses the standards that are seen in first charge lending
- First charge mortgage brokers are more willing to consider the option of a second charge mortgage
I’d like to focus on just one area: debt consolidation. In a recent report PWC said: “[The] UK’s unsecured debt mountain reaches £300bn or £11,000 per household exceeding pre-crisis peak by 30%”. Ultimately, it’s the demand from customers to find a longer term, sustainable solution to their borrowing needs which is helping to grow the second charge market.
For those of us involved in secured lending, it’s the rise of the less regulated unsecured market which causes demand. PWC added that this situation is not going to go away: “The rapid increase in unsecured borrowing in recent years reflects a change of attitude on the part of households across the UK. Following the financial crisis, we saw households repaying their unsecured debt, reducing their borrowing by around 10% between 2008 and 2012 – or closer to 25% if we exclude student borrowing.”
“However, since then, and despite the uncertainty created by political upheaval, a number of macro-economic factors have combined to create a climate of rising consumer confidence and borrowing. Car finance especially has grown by at least 15% in each of the past five years, representing the largest increase among the main unsecured lending products.”
“The true scale of the issue has now been put into sharp relief – but there is still more to come. We project that growth in unsecured borrowing across the UK will continue over the next three years, albeit at a slower rate. Our projections show we are heading for an unsecured debt pile of more than £340bn, or around £12,500 per household before we reach 2020.”
There are some very clear rules on the types of consideration that is needed when discussing debt consolidation with your customers.
As part of your advised sales process, when discussing debt consolidation you must look at the following:
- The costs associated with increasing the period over which a debt is to be repaid
- Whether it is appropriate for the customer to secure a previously unsecured loan
- Where the customer is known to have payment difficulties, whether it would be appropriate for the customer to negotiate an arrangement with their creditors rather than take out a regulated mortgage contract.
If that’s a daunting first step for those of you that have not discussed debt consolidation before, talk to the Specialist Mortgage Group (Y3S, Chaseblue Loans, Pink Pig Loans) or another master broker who are ready to find the right outcome for your customer.
For those of you still wondering whether a second charge mortgage is appropriate, let me just highlight a few facts:
- An average loan is now £43,000
- Loans typically range from £5,000-£1,000,000
- LTV is normally below 65%, but products are available up to 95% LTV
- The majority of customers have an A1 payment history
Quite simply, size is irrelevant, assessing the right outcome for your customer is more important. Hopefully the statistics above will show you that the second charge mortgage market will grow significantly in the coming years and it’s your chance to be a part of it!