Greater unsecured debt, complex incomes and issues around affordability are just a few of the potential difficulties facing mortgage borrowers in today’s economic climate.
This means brokers increasingly must look beyond the traditional products offered by some high-street lenders in order to cater to clients’ changing needs.
The specialist sector has always been a natural fit for complex cases, and a second charge lender may be able to offer borrowers the required flexibility, which could be lacking from a mainstream lender.
Second charge lenders may be more flexible with credit profiles, accepting borrowers with lower scores or a history of financial difficulties
For brokers not familiar with the second charge market, there has never been a better time to acquaint themselves, to help meet the demands of complex mortgage clients looking to raise additional funds.
Versatile approach
So how does the approach taken by a second charge lender differ from that of a first charge lender?
“Second charge lenders are far more likely to assess a client’s risk and position based on the reality of what is presented,” says Matthew Arena, managing director of specialist packager Brilliant Solutions.
“This is too time consuming for the majority of first charge lenders, which will look to put clients in a set product box as quickly as possible.”
The stance of second charge lenders enables unique credit and income circumstances to be underwritten sensibly, Arena adds. Affordability can therefore be greater and “there can be more flexibility with adverse credit”.
It should be second nature for intermediaries to think about a second charge when considering a capital-raise remortgage for their customers
As Arena highlights, this means a second charge lender may be able to help a client who is in a less-than-perfect financial situation.
“Second charge lenders may be more flexible with credit profiles, accepting borrowers with lower credit scores or a history of financial difficulties,” says Norton Broker Services broker account manager Jimmy Allen.
As well as having expertise in areas such as irregular income streams or non-standard employment arrangements, says Allen, lenders may be able to pro-vide a higher loan-to-value compared to some first-charge lenders.
“This can be beneficial for borrowers who have significant equity in their home but may not meet the stringent criteria of first-charge lenders,” he explains.
Fees are nothing to be concerned about but transparency and value should be something you expect
Donna Wells, managing director at specialist packager Envelop, believes second charge lenders’ more manual approach to underwriting can produce a more thorough understanding of a client’s requirements.
“Many second charge lender affordability assessments are based on individual income and expenditure, and not just on standardised loans-to-incomes or income multiples,” she says.
“Such lenders also cater to a wider range of income types and multiple incomes to aid the affordability assessment. This is a combination, particularly in the current climate where affordability is key, which allows customers to reach their financial requirements.”
The speed with which a second charge mortgage can be obtained is another thing in its favour, says Allen.
Deal costs and the flexibility around them are different. Speed can also be quite different and all cases are underwritten as specialist mortgages
“Second charge loans can sometimes be processed more quickly than traditional first charge mortgages. The faster approval process is often due to more streamlined underwriting requirements, and this speed can be crucial for borrowers who need funds urgently.”
Growing requirement
The latest figures from the Finance & Leasing Association show that over half — 59% — of all new secured loan agreements in September were for the consolidation of existing loans.
This is perhaps not surprising given that recent figures from the Bank of England show an annual 8% rise in overall consumer credit borrowing in September — the highest rate since November 2018. This peak was driven by a rise in the annual growth rate for credit card borrowing, which went from 11.8% in August to 12.5% in September.
Owners seeking capital for business purposes — for example, purchasing of additional shares — may find second charge mortgages appealing
Net consumer credit borrowing reached a staggering £1.4bn in September, with £0.6bn attributed to credit cards.
“Debt consolidation via a second charge continues to be in high demand,” says Allen.
“Homeowners facing multiple high-interest debts find second charge mortgages appealing as a means to consolidate their liabilities into one single, more manageable loan. This financial strategy allows individuals to unlock the equity in their homes without the need to remortgage entirely.
“By leveraging the equity, borrowers can secure funds at potentially lower interest rates compared to the combined rates of their existing debts. Additionally, the flexibility offered by second-charge lenders in terms of repayment schedules and interest options provides a tailored approach, empowering borrowers to regain control over their finances while simplifying their repayment responsibilities.”
Wells says debt consolidation and home improvements still generate the biggest demand for second charge business.
Many second charge lender affordability assessments are based on individual income and expenditure, and not just on standardised loans-to-incomes or income multiples
“In more recent times, debt consolidation has been more geared towards creating disposable income and monthly money management in light of the recent cost-of-living crisis,” she adds.
Range of uses
There are opportunities for second charge loans in the buy-to-let market also.
“A growing number of borrowers are looking to use their own home to raise capital to start building a new, or to expand an existing, property portfolio,” says Wells.
“Some landlords have also raised capital from their own home to make energy-efficiency improvements to their rental properties in line with the proposed changes to energy performance certificate legislation. Given the government U-turn on this, it will be interesting to see if the trend continues,” she adds.
The faster approval process is often due to more streamlined underwriting requirements, and this speed can be crucial for borrowers who need funds urgently
Loans for home improvement have consistently been a staple of the secured loan market too.
“Given the high cost of moving, some homeowners are leaning towards staying put in their property and looking at ways to improve their living situation, via either extensions for further space or soft furnishings, utilising smaller budgets,” says Allen.
A second charge mortgage may also provide a financial solution for business owners.
“Owners seeking capital for business purposes — for example, purchasing of additional shares, expanding property portfolios, purchasing of assets — may find second charge mortgages appealing,” adds Allen.
“It provides a source of funds tied to the property’s equity without the need to refinance the primary mortgage or raise via the business directly.”
Homeowners facing multiple high-interest debts find second charge mortgages appealing as a means to consolidate their liabilities into one single, more manageable loan
Although this market clearly has a lot to offer both brokers and their clients, some brokers remain hesitant about offering a second charge.
Arena has valuable advice: “The core element is to focus on what it enables and set it against alternatives. When viewed through this perspective, the market becomes a real enabler.
“Comparing rates and client charges to the first charge sector is not helpful, even if brokers may be pleasantly surprised. Compare the available solutions to the alternatives. There is a reason that secured loan advice is required for independence.”
Sector comparisons
Arena explains how this market may differ for a broker, compared to the first-charge market.
“Deal costs and the flexibility around them are different. Speed can also be quite different and all cases are underwritten as specialist mortgages,” he says.
Second charge lenders are far more likely to assess a client’s risk and position based on the reality of what is presented
“These cases are assessed fully and on a genuine risk basis so they are quite far away from the experience that a broker would get with 90% of their first charge cases. Also, many lenders are available only through packagers, so it is always worth using a packager to ensure you have access to the best product.”
He adds: “Working with a packager that is familiar with first charge specialist mortgages also helps you assess remortgage alternatives and should help you verify that the solution is the right one for your client.”
Arena says client fees, unfortunately, are rarely as transparent as they should be to brokers, whether a case is packaged or referred.
“If they are not displayed clearly on the company’s website, ask yourself why. Fees are nothing to be concerned about but transparency and value should be something you expect,” he advises.
Wells thinks the introduction of the Consumer Duty has helped to drive awareness, and with it an increase in the number of second charge applicants. She is positive about the benefits the sector can bring to mortgage brokers and their clients.
Comparing rates and client charges to the first charge sector is not helpful. You should compare the available solutions to the alternatives
“The diversity of the lenders operating within the second charge marketplace means they are able to cater for the majority of customers looking to raise capital, regardless of their circumstances, be that credit status, income types, property types or applicant types,” she explains.
“It should be second nature for intermediaries to think about a second charge when considering a capital-raise remortgage for their customers.”
Given the growing need for specialist advice these days, this expectation should not be far out of reach.
This article featured in the December 2023/January 2024 edition of MS.
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