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Summer swell in secured lending ahead of seasonal slowdown PDF Print E-mail
Friday, 11 September 2015

The second charge market enjoyed a strong summer, with monthly secured lending soaring to £85.5m in July, according to the latest Enterprise Finance Secured Loan Index.

Monthly completions jumped by 14% from May to June, then improved by a further 2% in July. The year-on-year improvement was even more marked, with 21% more second charge activity in July 2015 than in the equivalent month a year previously.

This means that the annual secured lending total stood at £849m for the year to July 2015, with the sector continuing to home in on the £1bn landmark.

Harry Landy, Director of Enterprise Finance, said: “After a slight calming in May, the second charge market soared in June and July as consumer appetite for secured loans boomed. Second charge completions have followed a similar pattern to wider gross mortgage lending in that they’ve really kicked up a gear after holding fairly steady throughout the spring. May’s figures were perhaps too early to capture the post-election feel-good factor, but the subsequent activity in June and July more accurately reflect the improving public sentiment.

“With almost £850m of second charge mortgages now being completed on an annual basis, it’s surely only a matter of time before we are talking about a £1bn-a-year industry. With public awareness of secured loans only set to be enhanced by the regulatory changes occurring in the spring when they come under the Mortgage Credit Directive, it would be no surprise if the sector surpassed this milestone at some point in 2016.”

Typical transactions

•    Average loan size stood at £56,120 in July
•    Typical first charge falls to £237,999
•    Current loan-to-value ratios decrease slightly to 58%

Average loan sizes fell to £56,120 in July, their lowest level since January. Despite some recent volatility in typical transactions, the average amount borrowed is still comfortably above the equivalent month last year, when loans averaged £44,055.

The mean loan-to-value ratio for a second charge mortgage was 58% in July, slightly down from the 61% recorded in May, but broadly in line with the averages recorded for the year to date. The typical first charge mortgage size that secured loans sit behind has remained fairly consistent throughout 2015, but fell to £237,999 in July.

Debt consolidation overtook home improvements as the most common reason for utilising a second charge mortgage in July, with 45% of borrowers now citing this as the major motivator. However, property refurbishment still remains a popular reason for taking out a secured loan and accounts for just under a third of all transactions.

Harry Landy continued: “The fact the second charge market continues to grow at such a fast pace despite typical loan sizes slightly decreasing is testament to just how many transactions are being conducted each month. Many of the other variables are holding steady despite the market hotting up, showing that both lenders and borrowers are remaining sensible despite the flurry of activity.

“Home improvements have long been the most popular reason for accessing equity tied up in one’s property, so it was interesting to see this overtaken by debt consolidation in July. While the economic outlook is positive and borrowing rates are so attractive, consumers are obviously opting to get their financial affairs in order and manage any exiting debts more effectively. A secured loan won’t always be the most suitable option, but in some circumstances it can reduce overall monthly payments and help borrowers feel more in control.”

Understanding the summer surge

Secured lending activity is traditionally strong in June and July, but a number of different factors have converged to make this summer’s figures particularly stellar. First of these is the increased certainty afforded by the clearer economic outlook post-election. Activity in April and May fell away from March’s level as consumers waited to see whether any changes to the political landscape would affect their decision making and lenders and brokers were similarly impacted by the uncertainty. The spike in second charge activity since then shows that borrowers are far more confident about accessing capital tied up in their homes now the economy is on a surer footing.

The second dynamic influencing the summer surge is the fact that August is often a quieter month for the sector as individuals postpone any major financial decisions until after the summer holidays and brokers and lenders often aren’t quite as prolific as resourcing levels are impacted by annual leave. To this end, July’s figures are sometimes artificially stimulated by cases being fast-tracked to avoid this seasonal slowdown.

Third is the fact that the second charge mortgage sector could be benefitting from an increase in the number of aborted remortgage applications. While the latest data from the Council of Mortgage Lenders shows that remortgaging soared in June, separate research has recorded a rise in the number of brokers reporting that clients are abandoning applications halfway through. 

Harry Landy added: “A number of elements combined to cause such strong second charge mortgage activity in June and July. But while the post-election surge and the spike in activity caused by wanting to beat the late-summer lull were expected, the impact the remortgage market has had on proceedings is less cut and dried.

“Previously when remortgaging activity was down year-on-year and secured lending was up on an annual basis, it was clearer to see how the second charge market was directly benefitting from the mainstream mortgage market’s travails. However, even though remortgaging activity is now soaring, a correlation can still be established. Homeowner appetite for finance is obviously still there, but with the tougher rules of the Mortgage Market Review in place, some borrowers are finding that their remortgage applications aren’t successful or are realising halfway through the process that remortgaging may not be the most efficient way of accessing the funds they need. 

“If homeowners are remortgaging to access capital, then it is always worth considering whether a secured loan might be a suitable option. Second charge mortgages coming under Mortgage Credit Directive legislation in March will undoubtedly help increase awareness of secured loans as a viable option, but in the meantime lenders and brokers have a duty to continue educating borrowers on this score.”

(Source - Enterprise Finance Press Release)


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