‘Seconds are a huge opportunity for brokers, and most are missing it’ – Crystal Specialist Finance

What is demand like currently for second charges? What are the most popular uses/has there been growth in particular areas?

There is always a consistent demand and need for second charges, considering the market they serve. They are a great product to either protect a client’s high street status or to return them to the high street.

The traditional need for a second charge is from clients that want to raise capital mid-way through a fixed term, without disturbing that low rate. This is obviously a big driver in the market at the moment as there are still 1.6 million borrowers whose fixed terms are ending in 2024 and their current rate is likely to be between one to two per cent.

Current economic conditions and high interest rates are also a driver as clients are using equity in their homes to consolidate unsecured debt and create a longer repayment vehicle through a second charge.

And finally, the cooling of house prices are making borrowers question their plans to move and many are using second charges to stay and improve their homes until the property market becomes more buoyant.

Do you think this demand level is sustainable/long-term or is it more of a short-term trend?

The second charge market is holding up well and the market is estimated to be worth £1.4bn in 2023 – down marginally from £1.66bn in 2022.

There will always be a demand for second charges given that there will always be borrowers who want to raise additional funds during a fixed term or those that want to consolidate debt and so on.

As a second charge can be used for almost any legal purpose, then there are also markets for paying tax bills, school fees etc. These are borrowing needs that many first charge lenders won’t consider or allow.

In the current market, where two-year fixed term deals start with a six and second charges with a seven, they are also a cost-effective way to raise funds.

What is the lender landscape like currently?

There are many lenders out there who specialise in second charges as they see them as an important channel in their business models given the size of the market.

Their lending criteria are more generous than first charges – lending up to six times income – and there are specialist lenders who don’t apply income caps and purely look at borrower affordability and many lenders don’t credit score.

Many also apply manual underwriting, avoiding the ‘computer says no’ scenario. With 95 per cent loan to value (LTV) deals available on borrowing up to £50,000, then declines are also unlikely even in a cooling property market.

 What are the main challenges with second charge applications at the moment?

Not necessarily a challenge, but lenders want the assurance of affordability. Given that many use manual underwriting then this isn’t a problem.

Are there areas that could be improved or are their underserved areas of the market?

As I mentioned above, second charges are a great way to either protect a clients high street position or get them back into the high street. For example, a client has £30,000 to £40,000 in credit card debt and is mid-term. If they were to consolidate this debt into a second charge then when they do come to remortgage, the ‘debt overhang’ calculation of the high street lenders is unlikely to catch them out. Otherwise, they may exclude themselves from the high street and be forced to accept their current lenders product transfer.

The self-employed market is also one that second charge lenders can serve – but many brokers won’t be aware of, for example, some lenders will consider self-employed with just one year’s full accounts  and use forecast income for part of the second year.

Buy to let is also underserved as a second charge can keep investor borrowing away from the main residence. Second charges are also useful to raise a deposit using the main residence to perhaps purchase a buy to let as a retirement income. These are areas of lending that first charges won’t consider through further advances.

Is this an area in which brokers upskill?

There are close to 35,000 second charge transactions per year and the majority are originated from Google or aggregator searches. So, it is vital that brokers speak to their client’s mid-term and understand their financial situation and needs at this time. Seconds are a huge opportunity for brokers, and most are missing it.

Brokers should also educate themselves on the wide range of clients that second charges can serve. They are not just for debt consolidation and mid term capital raising.

From the self-employed, the relatively new self-employed, those with second jobs, zero-hour contracts or buy to let investors. Second charges can serve a broad church of clients.

Brokers may also be unaware that some second charge lenders don’t require first charge consent (depending on amount borrowed) – which is often seen as a stumbling block in the transaction.

If brokers have opportunities and don’t want to advise themselves, then a distributor like Crystal Specialist Finance are a great way to access the market. They offer fair value because they consider the whole of the market, rather than one or two lenders, and will find a solution that fits the client’s situation.