How is the market for second charge mortgages faring in the face of uncertainty?

All facets of the consumer credit market have been influenced by economic uncertainty, including second charge mortgages.

According to Fiona Hoyle, director of consumer and mortgage financing and inclusion at the financing and Leasing Association (FLA), “new business in April was 23% lower by value and 22% lower by volume than the same month last year.”

The second charge market, according to experts, is actually expected to experience an increase in demand over the course of 2023 as a result of the economic instability.

In order to learn about trends and future expectations for the second charge market, Mortgage Introducer consulted with a number of important players in the industry.

Trends in the market for second mortgages

Due to continuous economic instability, banks cancelling agreements, and interest rate increases as clients want to use their current equity, Jade Keval, sales director at Somo, anticipates seeing an increase in demand for second charge throughout the year.

According to Keval, “there doesn’t appear to be any particular trend in what second charge loans are being used for; it’s just for any business purpose.” People who want to expand their business, buy new properties or a fleet of vehicles, for a marketing campaign, or for modernised IT systems, use them.

According to Keval, second charge loans are also offering a solution for paying off business debts or expenses, renovating real estate, or covering employee wages.

Additionally, Keval added, “there are landlords who still have an appetite to continue buying or converting property, and are using second charge loans,” despite the fact that typical monthly interest payments on buy-to-let homes are skyrocketing.

Hoyle said second charge mortgages continue to be a valuable product for individuals who do not want to disturb an existing first charge interest rate that is lower than remortgaging in the current environment, notwithstanding consumer credit users’ understandable caution about discretionary spending.

The distribution loan purpose revealed that 59% of new agreements were for the consolidation of current loans, 13% were for house upgrades, and another 22% were for both debt consolidation and home improvements in the most recent data set for April 2023, she said.

Challenges in the second charge market

Hoyle stated that this current period is the final push to ensure compliance with the new rules and instructions since Consumer Duty challenges in the second charge market will go into effect on July 31 for both new and existing items or services.

According to Hoyle, “second charge providers will have to show that their products and services meet the needs of customers, just like lenders in other markets.”

Hoyle said that they will also need to demonstrate that their goods and services offer fair value, that all communication satisfies consumer comprehension standards, and that efficient customer care is offered for the duration of the product.

In the meanwhile, according to Keval, the largest issue facing the industry right now is a lack of knowledge on second charge loans.

Our goal is to live in a society where second charge lending is typical and equally usual as going to a high street bank to raise money in five years’, she said.

Although Keval has seen an increase of brokers willing to accept second charges, she claimed that more needs to be done to spread the word about the benefits that this segment of the market may provide.

2023 Expectations

In an effort to combat price increases and curb inflation, the chancellor has stated that raising interest rates is the UK’s “only option,” according to Keval.

Keval said that 2023 will likely be a year in which homeowners and landlords stay put and use their current equity for business as interest rates rise and loan expenses rise.

Keval thinks that this will increase demand for second charges because individuals still want to access the equity in their homes and hold onto their existing contracts.

Brokers should consider that if homes stay around and carry out repairs during this period of instability, this amount is likely to significantly climb because in 2022, borrowers took out about £2 billion in second charge loans, she said.