Growth will stall unless more advisers consider second charge as a funding option, she also warns
Second charge lending has passed the £2 billion annual mark for the first time in two decades, but one specialist broker says the market still operates as a niche rather than a mainstream option for most mortgage brokers’ clients.
“We are still very much a niche industry,” said Sarah Stroud (pictured top), director at Truffle Specialist Finance. “Our products and criteria are designed with total flexibility which enables cases to move to completion.”
She pointed to unsecured credit as a typical area where second charges can offer a route that is not available from high street lenders. “High Street lenders have a cap on the amount of unsecured credit that can be raised,” she said. “That doesn’t happen in seconds, if the case passes affordability and the consolidation is the right outcome for the client, we can proceed, subject to underwriting etc.”
Stroud said the perception of the typical second charge customer has shifted in recent years. “Despite common perceptions, second charge lending frequently supports successful clients whose financial complexity requires a more flexible approach than mainstream lending allows,” she said.
“In the past, it would be fair to say it was geared towards modest incomes, perhaps some adverse that required specialist lending. This, coupled with high fees and early repayment charges, gave the product a bit of a stigma. I’ve heard many times over the last few years ‘my client doesn’t need a second charge’. Now, the industry will regularly deal with clients earning six figures and senior positions within their industries.”
Lenders, Stroud pointed out, have responded to the growth in volumes by adjusting their approach to risk and criteria. “The industry has had to adapt its criteria to move with the times,” she said. “We are now seeing greater flexibility from our lenders, referrals for grey areas, brokers like myself pushing criteria and having the underwriters adopt a more common-sense approach. If the deal feels right and we are providing the best outcome for the client, the referrals are normally accepted.”
New entrants, she added, are changing how cases are discussed. “New lenders are coming to the market and bringing with them a breath of fresh air,” Stroud said. “Their approach is pick up the phone, talk to me about the deal. This then puts us in an environment whereby we discuss ways to agree the application rather than list reasons for the decline which doesn’t help anyone!”
The current “rate-lock” environment is a major driver of second charge demand, according to Stroud, as borrowers seek to preserve competitive first-charge mortgage rates and avoid early repayment charges. “A large percentage of our business comes from brokers whose clients are say two years into a five-year deal with high ERCs and it makes no sense to move the mortgage,” she said. “Due to their lender’s criteria, failing the credit score as an example, they are unable to secure a further advance. The broker will then need to look at alternative options, and the second charge must be strongly considered.”
She said second charges are also being used alongside product transfers where further borrowing is still required but mainstream options are closed off. “Once again if a client is unable to remortgage, or obtain a further advance, but still requires additional borrowing, the broker is likely to arrange a product transfer and they should then review the second charge market options,” she said.
“If they don’t they run the risk of the client going elsewhere, perhaps to another broker who has the necessary skill set to spot a second charge. They will then speak with their trusted packager and more than likely win the business from the client. This then puts the mortgage renewal, buildings insurance and life cover uplift at risk because the broker didn’t bring the product to the clients attention.”
On regulation, Stroud said the current regime provides an essential framework for advice while still allowing innovation. “The regulation is critical to support the broker, the lender and more importantly of all, the client,” she said. “With so much focus on the suitability of the product and the recommendations that you make, everything must be done within the parameters set out by the FCA. I believe that lenders can still be innovative with their products and criteria.”
Looking ahead, she believes the second charge sector has “so much growth potential”, but warns that broker engagement will determine how far the market can develop. “Without sounding controversial, not all brokers think about second charges as a funding option for their clients, and without their support, the market will not grow to its true potential,” she said.
“As a second charge broker, I do struggle with the minority of brokers who just dismiss the product as not being suitable for their clients. Sometimes, they don’t even explore the options and unfortunately, they are the ones that will run the risk of potentially losing clients.”
For Stroud, second charges are a tool to solve client problems rather than a product customers seek out directly. “Nobody wakes up in the morning and as they are preparing breakfast, decides to go and get themselves a second charge,” she said. “What they do wake up with, is a problem that needs a solution and they are looking to their mortgage brokers to find that solution. If they don’t, other brokers will!”
After more than a decade working in the market, Stroud argued that closer collaboration between mainstream advisers and specialists will be key to the sector’s next phase. “As a broker that has been in the seconds for the past 13 years, I’ve seen many changes, but one thing remains the same, this is a fantastic industry which offers a superb range of products,” she said.
“The product hugely complements the broker’s skill set and by using a specialist packager, spending time to build a relationship, specialist brokers sharing knowledge to assist brokers to spot opportunities, providing case studies, we can grow the second charge market to become even greater.”
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