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FCA second charge investigation hit Q4 lending growth

  • 06/04/2018
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FCA second charge investigation hit Q4 lending growth
The second charge market has continued its growth past the £1bn lending barrier, despite the Financial Conduct Authority (FCA) investigation 'softening' lending at the end of the year.

Latest data from trade body the Finance and Leasing Association (FLA) showed the second charge market lent £1.032bn in the year to February through 22,270 transactions – up 17% and 14% respectively.

The publication of the FLA data coincided with Enterprise Finance’s review of the market in 2017.

Enterprise Finance noted that overall, the sector had seen a positive calendar year and added that the move into Mortgage Conduct of Business (MCOB) regulation was seeing fees and charges fall.

And it expected the use of second charge for buy-to-let (BTL) and to facilitate home improvements to continue the market’s growth.

However, Enterprise Finance acknowledged that the regulator’s review of the sector in the last few months of the year, which prompted lenders such as Shawbrook to pull products, had taken its toll.

“November softened slightly, as a number of deals were withdrawn from the market while some reviews of lending underwriting standards took place, but nevertheless topped £80m,” the broker said.

The report made no other reference to the FCA investigation of the market which included a Dear CEO letter and workshop for lenders.


Fees and charges

Regarding passionate debate around fees and charges, the broker noted that one of the most substantial effects of regulation transition to MCOB rules had been a significant reduction in fees and charges across the board.

“Under Consumer Credit Act (CCA) regulation, no fees could be levied before completion. Under MCOB rules, upfront charges can be made,” it said.

“That has meant a proliferation of fee models as providers look at alternative charging structures. Simultaneously, clear statements of fees on ESIS mortgage illustrations has increased visibility and transparency, while increased competition has driven fees down – by around 40% for Enterprise.

“Overall, this significant reduction in costs to the borrower has also served to increase attractiveness of the second charge mortgage proposition when compared with first charge options, for clients and brokers alike,” it added.


Market conditions

It appears the market growth in 2017 was being driven by more deals of a smaller nature.

The annual numbers of cases rose 14.4% from just over 19,000 in March 2017 to almost 22,000 by December.

Meanwhile average transaction sizes, were up 3%.

“With a flat economy and housing market, the greater positivity in second charge mortgages may be driven by three factors: home improvements, debt consolidation and BTL second charges,” the broker said.

Debt consolidation is the second largest use of second charges, to reduce monthly outgoings on unsecured debts.

“As markets anticipate a further 0.25-0.75% rise in the Bank of England base rate in 2018 the cost pressure of unsecured debts is likely to grow further, adding more consumer value to securing credit via a second charge,” it continued.

But it seems buy-to-let second charges are seen as a rapidly emerging niche with strong potential for growth.

“Interest in this area has grown substantially during 2017 as a result of regulatory changes on affordability, following the phase-out of personal tax relief of mortgage interest on private rented properties,” it said

“With a reported 50% of the new mortgages written in the huge March 2016 BTL spike being sold on two-year fixes, March 2018 is likely to see a surge in BTL refinancing as those deals expire.

“We anticipate burgeoning interest in second charge BTL mortgages to expand as a result,” it added.


Very positive 2017

Enterprise Finance managing director Harry Landy said that despite a quieter fourth quarter in comparison to the middle part of the year, the second charge mortgage market had a very positive 2017.

“Clearly, the most important factor in enabling that growth remains education of the key decision-maker in any deal: the broker,” he said.

“As growing broker understanding is bearing fruit, it’s important not to become complacent. We have to remember that education is a long and repetitive process, so there is a lot more work to be done to ensure that all brokers really know what second charges are, when they are appropriate and should be considered, and how to place them efficiently for clients,” he added.

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