And that seems to have played a detrimental role in the UK’s wider property market, with softening of transactions, a marked drop in residential property prices in London and the South East and a pessimistic outlook from market participants.
But the opposite is true in the second charge mortgage arena. Indeed, 2017 has been a year of sustained growth for the sector following a disappointing 2016, with lending reaching £979m for the year up to September 2017.
To put this into perspective, this is an increase of 10% compared with the same point in 2016 – and we think this highlights the resilience and prospects for the sector.
When comparing the market year-on-year – using data from the Finance and Leasing Association (FLA) – the sector experienced seven months of consecutive growth from March to September 2017, and second charge mortgage new business has consistently increased by both value and volume.
The trend we are seeing confirms that an increasing number of individuals are turning to specialist financing options over more conventional ones.
The sector’s strong performance even defied traditional seasonal blips: between July and August this year – typically a much quieter period for the market during the summer holiday season – monthly lending reached £90m and £91m respectively, the second and third highest months since the 2008 financial crisis.
Consumers turn to debt
So what factors are behind the sector’s resurgence after a flat 2016?
One reason could be that, more than a year after the referendum, consumers have had to turn to debt.
With rising inflation and stagnant wage growth, household incomes have tightened, so consumers have had to borrow capital to make large transactions. Furthermore, people are using more short-term credit to cover day-to-day expenses.
These factors, to a certain extent, explain why the second charge market has experienced continued growth this year.
HMRC property transaction figures from the second half of this year paint an inconsistent picture of property confidence. Despite a 1.3% rise June and July, volumes fell by 0.5% in August, followed by another 1.8% decline in September.
While we would expect these months to be characteristically quiet, it does paint a subdued picture of the market. The fact that there was another increase of 1.7% in October only adds to a shaky picture of the general health of the market.
Additionally, the Royal Institution of Chartered Surveyors (RICS) has reported that market confidence has been extremely low since the Brexit vote, and its market survey for November was furthermore downbeat.
In October, most UK regions saw new agreed sales displaying a flat to negative trend, alongside 62% of contributors reporting that sales prices were coming in lower than asking prices for homes listed at between £0.5m and £1m.
These facts suggest that consumers are stepping out of the market and may instead be opting to renovate or build extensions on their existing property.
This is one of the principal reasons for taking out a second charge mortgage, which may be driving the relative buoyancy of second charge lending.
Benign interest rates
In addition, recent data from PwC shows that unsecured personal debt in the UK is now closing in on a record £300bn; alongside this, Moneyfacts has also warned that interest rates on credit cards are at their highest for 10 years. The average rate on cards is now at 23% APR.
By contrast, second charge mortgages are still offering relatively benign interest rates, therefore taking out a second charge mortgage can be ideal to consolidate household debts, and reduce monthly outgoings.
With the Bank of England’s decision in November to raise the base rate to 0.5% adding to the financial pressure of unsecured debts, securing through a second charge mortgage may be a more appealing alternative.
Moreover, the availability of long-term, fixed-rate second charges without early repayment charges means consumers can get security that payments won’t rise, with flexibility to switch if they need to later.
Another key factor in the upward trend for the second charge market is that brokers are becoming increasingly comfortable with second charge products and are therefore better able to advise their clients accordingly.
Knowing the benefits that second charge mortgages can aid their clients in unlocking further growth in the market, which must result in better customer outcomes.
That’s why we are committed to explaining second charge mortgages to as many brokers as possible, whether appointed representatives or directly authorised, through our ongoing programme of broker education.
There may well be some bumps in the road as Brexit negotiations continue, but the strength of the second charge market’s performance this year so far gives us real optimism that this upward trend will continue in the months ahead.