Second charge will be ‘big business’ in 2023 – analysis

Matt Tristram, co-founder of Loans Warehouse, said that second charge lending had grown 20 per cent in the last 12 months according to its index.

He added the sector is “expected to grow significantly” over the next 24 months with people avoiding a remortgage as this will push the rate on their main borrowing higher.

Broker firms report quadrupling of second charge enquiries in recent months

Many broker firms agreed that they have seen a large uptick in second charge enquiries in the past year, with Justin Moy, managing director at EHF Mortgages, said the number of applications for secured loans have quadrupled in the past year.

He explained: “They have become more popular as clients have been able to facilitate a product transfer on preferential rates, and then top up on a higher rate through a secured loan. That way, the overall cost has been significantly lower than remortgaging the whole balance.

“This especially works for those with a small blip on their credit file, as the original mortgage is still on high street rates via a product transfer, just the extra borrowing is on more expensive rates.”

Moy added that the affordability assessment was typically “more generous”, so for those with limited budgets second charges could be a “life-changer”.

He noted that the process for a secured loan could “still be quite involved” as the original lender and this could take time but overall the “benefits still outweigh this delay”.

According to Criteria Brain, on the residential side 32 lenders accept simultaneous first and second charge, while 38 lenders do not.

Matthew Jackson, director at Mint FS, added that at his firm has seen second charge enquiries increase by 42 per cent in the last three months alone.

He said that they were popular for two reasons. One being that they clients do not want to break their long-term fixed rate to raise additional finance on their property as the early repayment charges are too high and comparable interest rates are “double or even more then they currently pay”.

The second is that that first charge lenders are squeezing affordability, stress tests and debt consolidation to an extent so clients are limited from obtaining further advances or remortgages.

“Second charges are the natural next step for any client refinancing, and any broker should naturally end up with this solution if a further advance or first charge remortgage is not possible. The uses would typically be for either debt consolidation or home improvements or extensions but they can also be used for business purposes or even paying tax bills.”

Aaron Foster, director at Create Finance, agreed that second charges had grown in popularity over the last 12 months as many clients coming off their fixed rate deals may no longer eligible for further borrowing with their current lender due to stricter affordability criteria.

He said that this could be due to adverse credit, self-employed status or being impacted by Covid.

Foster said that as mortgage rates have increased “it makes more sense for those clients to apply for a product transfer with their current lender and then borrow money elsewhere”.

He added that the process was much quicker than a standard remortgage and income multiples were “considerably higher” so customers could take more equity out of their property.

“I think this market will grow considerably next year as first charge lenders tighten affordability and it becomes more difficult to borrow additional funds with their current lender.”

Second charge will see major growth next year

Brokers all-round said that second charges could only grow in popularity next year as rising cost of living, along with stricter criteria from first charge lenders, pushed customers to consider more forms of finance.

Riz Malik, director at R3 Mortgages, said: “Second charge lending is going to be big business in 2023 as many people look to consolidate as well as reduce their monthly outgoings.

“Second charges allow you to keep your main mortgage untouched which is beneficial especially if you secured a product pre-September 2022. In addition, your borrowing capacity could be greater than by seeking a further advance with your current lender. If you are consolidating debt, you should be aware of the consequences and seek professional advice regarding your options.”

Moy agreed that there would be a sharp increase in volume for second charge market assuming that rates and affordability “still work in their [customer’s] favour”.

“With more clients looking to product transfers in 2023, the additional borrowing may be ideally placed with a secured loan, rather than a remortgage.”

UK Finance figures released earlier this week show that product transfer lending could generate £212bn in gross lending next year. The trade body has also predicted mortgage maturities could hit 1.8 million next year.

Jackson said that the “risk culture permeating through first charge lenders” post mini Budget, second charges would “continue to grow in 2023 and we will see demand increase month-on-month”.

Chris Sykes, technical director and senior mortgage adviser at Private Finance, said that second charges was “definitely going to be an area of business that grows over the next couple of years”.

He said that due to how quickly interest rates have risen, increasing by a record 0.75 per cent to three per cent last month, if someone was on a fixed rate the mortgage “becomes all the more valuable to hold on to”.

Sykes explained that if someone had £400,000 outstanding at two per cent fixed until 2025, but needed an additional £75,000 and their current lender will not facilitate, they could take out a personal loan, remortgage or further advance.

However, remortgaging to five per cent would cost tens of thousands extra over the next few years and there could be an early redemption charge, so the best advice would be to get a personal loan, which may not go up to £75,000, or take a second charge.

Sykes said that criteria was flexible on income multiples and affordability but warned that second charges do “invariably cost more”.

James Raymond Vince, managing director at Castle View Finance, said that with more lenders entering the second charge space it expected the process to become more streamlined with desktop valuations with some lenders.

“This doesn’t take away the first step of investigating further advance with the first charge lender – usually cheaper and quicker than a separate second charge lender.

He said second charges would be an area of growth to “support consolation of debts and cost of living re-alignments”.

Raymond Vince continued that this would allow consumers and investors to “better position themselves for the years ahead”.