Buster Tolfree, Commercial Director – Mortgages
Having devoted my 20-year career to the mortgage industry, dating back to the first incarnation of Private Label and more recently within the second charge market, I’ve seen a lot of change…
…M-Day, MCoB, MMR, MCD, the list goes on! Even just in the last five years there have been considerable improvements to transparency and professionalism and a majority of brokers and mortgage lenders have demonstrated a genuine commitment to delivering positive customer outcomes. Despite this, when it comes to second charges specifically, there are still some misconceptions harking back to what some might describe as the ‘wild west’ days.
Some of these relate to the sort of customers who apply for second charge loans and some to the now defunct old-school brokers and lenders who provided them. Many of the negative stories focusing on the seconds market are propagated by those who haven’t kept up with the evolution of the industry or have their own agenda to push.
Much as everyone knows a rogue estate agent story, most people have heard or read an eyebrow raising story regarding second charges and a few industry outliers can cause an awful lot of reputational damage. At UTB we welcome the current climate of continual improvement across the whole mortgage market; when leaders stop driving enhancements is when consumers will suffer.
One of the biggest differences I’ve noticed in recent years is how much a typical second charge borrower has changed. If you thought they were all customers with huge credit card bills and a bit of equity in their flat, you may be surprised. Here’s a snapshot from a UTB perspective.
If you’re not in the industry, the first thing to come to mind when someone says ‘second charge loan’ may well be debt consolidation. Many of the column inches personal finance journalists devote to second charge loans focus on this one use alone, and often it’s viewed in something of a negative light. Around one third of the seconds UTB has completed have a debt consolidation as a primary purpose and I could write a whole other article on why we and Best-Advice Brokers see second charges as an excellent way for customers, in certain circumstances, to get their finances under control and, to some degree, get their lives back. But that’s for another article.
That all said, more than half of the loans we complete are to fund extensions and other home improvements. For example, we recently completed a loan of £110,000 to enable the customer to complete extensive landscaping to their self-built luxury home. The rest tend to be for a wide range of other purposes and these can include, amongst other things, the purchase of part (or all) of a buy-to-let investment or holiday] home, car purchases and even in some instances, to pay children’s school fees.
That last use may give you a big clue as to the typical UTB customer demographic. We operate in the prime end of the market and yes, even prime customers find some debt consolidation useful. Most of our customers are couples in their mid to late forties or older, they generally have children and both partners work. The average property value on which our second charges are made is around £400k. According to FLA figures the average second charge loan size has increased from around £25k ten years ago to around £45k now and this would be roughly in line with our experience. The LTV of around 60-65% on a second charge loan hasn’t changed much over the last ten years though, so it is higher property values which have enabled the loan size increase. Many of our borrowers are from London and the South East but we do have a geographic spread roughly in line with population density.
Average repayment terms requested at the outset are around 15 years, although we’d expect most to redeem within about 4 to 5, and two thirds request a fixed rate product giving them surety of their repayments for the fixed period; important when Base Rate is expected to rise further in that period. Even with a fixed rate, having no early repayment charges means the borrower can refinance whenever circumstances suit, without penalty.
Considering the above, imagine if you put a typical UTB second charge customer in a room with a typical re-mortgage customer. You’d probably be hard pressed to tell them apart; that’s why we are pleased with the increasing trend of Best-Advice Brokers considering both products alongside each other But why would one take the second charge route?
Lots of reasons actually. For example, many customers have a really good first mortgage deal, maybe a great fixed or tracker rate that they don’t want to give up. Taking a second charge at a higher rate may mean that the blended rate across the whole debt is still lower than a new first deal so a second charge loan can make good financial sense. Some borrowers may face a stiff early repayment charge on their first mortgage if they remortgage the lot.
Others may have had a change in their circumstances which means switching to a bigger first charge mortgage is not an option. Perhaps they started a family or changed jobs resulting in a different source income. And let’s not forget, second charges can be considerably quicker to complete than remortgages, especially with the expanded use of Automated Valuation Models.
Now that the Mortgage Credit Directive (MCD) has encouraged, and forced some, brokers to consider the suitability of seconds alongside remortgaging to remain independent, the market is expanding and lenders like UTB are developing products to serve it. A majority of the industry has embraced the increased regulation brought about by the MMR, MCOB and MCD and evolved their services to match the higher standards demanded. We see it as key to increasing consumer trust in a product that still has a tarnished reputation in some peoples’ minds. And it’s working.
Recent FLA figures revealed that the rate of second charge repossessions in 2017 fell to a record low of just 0.06%, that’s within shouting distance of the rate or first charge mortgages at 0.02%.
Customers are winning, and enlightened brokers are winning too. Those who previously may have thought it’s a ‘remo or nothing’ have an equally useful and increasingly respectable alternative to call upon. There is still some work to do in some areas of the market, as the recent FCA Review highlighted, but the market has moved forward immeasurably since that which existed pre-Credit Crunch. And these days, thanks to the nefforts of the majority of industry participants, when brokers recommend a second charge mortgage wisely they can be assured their customers will get a great product and an efficient, professional and transparent service.