Tony Marshall, managing director of Equifinance, looks at various scenarios where second charges can be the perfect fit
The second charge market is in good shape. The FLA reports that new business in July was up 6% by value and 5% by volume, with growth expected to continue in 2018. New business volumes in the market are returning to levels last seen in 2015, before regulation transferred to the FCA’s mortgage regime. The sector has shown resilience during a period of significant regulatory change and it’s clear that the messages about the versatility of seconds is reaching a wider broker market.
The current low rate conditions and the wider loan purposes are also resulting in favourable outcomes for more customers.
As well as the large number of second charge products now available, the types of customer being helped are on the rise and with a little bit of time spent understanding their circumstances and background, a second charge mortgage can be the perfect fit in a growing number of cases.
There are still also many consumers being refused credit, prime mortgages or re-mortgages due for a relatively minor reason, as many mainstream lenders don’t underwrite each case individually and lack flexibility when looking at the customer’s longer term prospects. For this reason, a number of major players in the market have withdrawn and are no longer servicing the seconds market. This has opened up new opportunities for specialist lenders with a business model and experienced underwriters geared to this sector.
More County Court Judgments (CCJs) were registered against consumers in England and Wales during Q1 2018 than any other quarter since current records dating back to Q1 2005 began, according to figures released by the Registry Trust.
During Q1 2018, 305,877 judgments were registered against consumers. It’s important, however, to look at the reason a customer got a blip on their credit record and check that their future employment and income prospects are stable to take on a loan for a few years in order to help them get back on their financial feet. By doing this, access to new mainstream products will open to them going forward as their credit profile is repaired.
If larger debt has been built up over a number of years, a second charge can also be used to buy customers out of debt management plans, allowing them to have more control over their financial future by demonstrating they are capable of repaying an important loan over a number of years.
Second charges can do this as they are secured on a property, which is in sharp contrast to unsecured finance where a lender can’t assess the commitment and ability to repay. This is because in many cases there’s no structured repayment plan with longer term goals, meaning that many get traped in a revolving credit cycle that can easily spiral out of control, and often these loans only satisfy a very short term need.
There are also a number of scenarios happening in the mortgage market where a second charge can fit well into the requirements of a customer struggling to get additional funding for a house move or improvements.
We’ve seen a number of customers becoming ‘mortgage prisoners’ for several reasons. For example, when they are looking to remortgage, they realise they have punitive Early Repayment Charges which precludes them from achieving their goals such as improving the property to add value or for carrying out essential repairs.
There’s also been a huge rise in the number of interest-only mortgages coming to the end of their terms, with borrowers being refused further loans unless they prove how they can pay off the capital amount remaining on their mortgage.
Again, a second charge can buy the borrower valuable time to plan to raise the required amount by raising all or part of the capital to help out in a difficult situation.
In conclusion, we are seeing good conditions in the market that are favourable for seconds to work as part of a financial planning and fund raising requirement for a diverse profile of customer. From helping to resolve short term credit issues, to reaching longer term goals, seconds are the perfect fit in many situations.