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Annual second charge mortgage lending homes in on £1bn mark as MCD preparations continue PDF Print E-mail
Tuesday, 10 November 2015

Secured lending activity soared to £93.3m in September as more intermediaries wake up to the potential of the products ahead of the Mortgage Credit Directive (MCD), according to the latest Enterprise Finance Secured Loan Index.

With the Financial Conduct Authority recently suggesting that brokers will lose the ability to call themselves independent if they don’t offer both first and second charge mortgages from March 2016, monthly completions rose by 6% in August and then a further 3% into September. This continued improvement means monthly gross secured lending is now a third higher than it was in September 2014.

Annual second charge mortgage lending now stands at a fraction over £900m and will pass the £1bn mark in the early part of 2016 if the current rate of growth holds steady.

Harry Landy, Sales Director of Enterprise Finance, said: “Preparations for the implementation of the European Mortgage Credit Directive continue apace and brokers are realising that if they don’t offer second charge mortgages in addition to first charges, they are not only potentially doing their clients a disservice by not considering the full range of potential options, but won’t be truly whole of market and may have to become restricted advisers.

“With this in mind, we’ve seen the volume of secured lending increase steadily throughout the year as awareness around the new regulatory regime increases and brokers wake up to the fact that second charge mortgages are just as viable an option as remortgages or further advances in many instances. Monthly secured lending has more than doubled since the beginning of 2013 and once it comes under the same jurisdiction as first charge mortgages, is only set to increase further.”

Typical transactions
· Average loan size rises slightly to £56,553 in September
· Typical first charge falls to £221,320: lowest level in 2015
· Current loan-to-value ratios stand at 61%

Despite the increasing amount of monthly second charge mortgage lending throughout the year, average loan sizes have remained steadfast and rose by just 0.7% between July and September to currently stand at £56,553. This represents a 4.6% increase from the £54,050 recorded at the beginning of the year.

Typical loan-to-value ratios for secured loans have also shown consistency throughout 2015, with the 61% seen in September broadly in line with the long-term average. The average first charge mortgage size that second charges sit behind fell to their lowest point of the year in September at £221,320.

The percentage of homeowners using second charge mortgages to fund home improvements – of those who specified a reason – rose by 5% from 40% to 45% between July and September. However, debt consolidation narrowly remains the most common reason for obtaining a secured loan, with the remaining percentage accounted for by capital raising and purchase.

Harry Landy continued: “Using second charge mortgages to fund renovation projects continues to prove popular as a growing band of homeowners opt to improve rather than move. House prices continue to soar, but the cost of funding and refurbishment work hasn’t spiraled out of control at the same rate, meaning it can often make sense to extend or enhance your current property as opposed to taking the expensive next step.

“Debt consolidation remains the most common reason for people using secured loans in September, but it will be interesting to see how this changes once second charge mortgages come more into the public consciousness in the spring. With secured loans suitable for a range of capital-raising scenarios, we are likely to see a diversification in the motivating factors as they become even more popular.

“The continued rise in monthly secured lending against a backdrop of consistent average loan sizes gives some indication of quite how quickly transaction levels are rising. Average loan to value ratios have also held steady as demand for second charge mortgages goes from strength to strength which shows that borrowers and lenders alike are not taking on riskier loans than previously.”

Taking an interest
Another area of potential growth for the second charge market is assisting those trapped in interest-only mortgages to improve their financial position. With an ageing population and a significant number of homeowners on interest-only mortgages nearing retirement with no repayment vehicle in place, the situation has been described as a ‘ticking timebomb’.

Secured loans could be of use to some individuals in such a scenario by helping them consolidate existing debts into more manageable payments, improving their affordability situation and freeing up valuable extra funds.

Figures from Citizens Advice suggest that as many as 3.3 million mortgage holders in the UK have interest-only mortgages and it is estimated that 934,000 of these have no repayment plan in place.

Harry Landy added: “The interest-only ‘timebomb’ term has been bandied around for more than three years now, but ways of defusing it have been in pretty short supply. No-one is suggesting that second charge mortgages are a cure-all solution for homeowners stuck on interest-only loans, but they certainly represent an option for individuals who want to proactively tackle their financial situation and not bury their heads in the sand.

“In an ideal world, everyone would take out a capital and repayment mortgage, but it’s not always possible and previous lending criteria weren’t stringent in requiring a specified repayment vehicle. For some people, investments under-performed, leaving them short. Secured loans can help homeowners consolidate debts they may already have, leaving them in a stronger position to pay back what they may owe on their property.”

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