SLS In Focus: Second charge market needs ‘injection’ of new lenders – Tristram

Speaking to this publication, Tristram said that there needed to be a “bit of an injection” of new lender blood into the second charge space.

He said that over the past few years some key actors such as Paragon and Masthaven, had exited the market and whilst the “slack has been picked up by others” new entrants would provide more choice and increase competition.

Tristram added that there were rumours of around three lenders possibly launching this year into the market.

He added that lenders were “talking very positively” about the market and he did not expect any lender casualties.

“Lenders have got a lot of money and they need to lend but at the moment they are not quite sure what rate to lend at because they securitise and so on. Within lenders, there are a lot of conversations going on,” Tristram added.

He explained that securitisation is based on assumptions about interest rates in the next few years, and due to the mini Budget turmoil expectations of interest rates varied significantly or were more uncertain, which made it harder to set pricing.

He said that second charge activity had been “flying” in October and then rates went up, coming to around “three per cent across the board”.

“It’s not like anything we’ve had before where there is a lack of funds and they’re worried where the next lot of money is. It literally is ‘what rate do we lend out at?’”

Lenders being more cautious

Tristram added that another challenge was that the first lender who drops rates would then get inundated with business unless others followed suit.

“There’s a little bit of juggling to be done because most lenders have pulled back. It’s not that they suddenly declining every deal but there is definitely a bit of caution, so fewer deals are getting through.”

He added that rates were higher than they have been previously, meaning that customers would suffer a rate shock. However, he said that this was partially due to customers being accustomed to a lower rate environment.

Tristram also said that lenders had put in bigger stress tests, which did limit the number of customers you can get through as second charges have to factor in the existing mortgage payment.

He said historically it was three per cent across the board, but several months ago lenders were stress testing at around seven per cent because of fears that interest rates would increase dramatically.

Tristram said that widespread expectations were that activity would pick up in March, with January and February activity expected to be a bit more muted.

The latest Loans Warehouse Secured Loan Index showed second charge lending for January rose slightly to £104.5m, a 2.92 per cent uplift on the previous month.

He said that demand would increase once lenders felt that the market was “more balanced”.

“What we hear from lots of lenders is you’ve got a slow six months and by March, we hope to be ramping up. They will probably do that in a slow way as no one wants to stick their head completely above water.”

Heightened fixed rate pricing ‘perfect opportunity’ for second charges

Tristram said that this year was a “perfect opportunity” for seconds, as there were huge swathes of customers on long-term fixed rates.

He explained that anybody who was coming out of a fixed rate at the moment would face a rate increase, therefore “anybody that’s in a fixed rate needs to have a hell of a lot of reason to come out of it”.

An example would be someone who has a 10-year fixed rate, is three years into their term but want to borrow £50,000.

He said: “The only way to do that is going to be a second charge because they’re not going want to touch the £400,000 they’ve got at 1.5 per cent for the next seven years for the sake of £50,000.

“The fact that so many people have really good fixed rates that they know when they come out of them, their rate is going to go up means this is a perfect opportunity for seconds.”