The evolving demographic of second charge loans
The second charge loan market or secured loan industry, depending on your preferred term has undergone a fascinating renaissance in the last few years thanks in part to the mortgage credit directive in 2016. All the recent statistics suggest the product seems set to finally fulfil its promise as not just a fall back but a considered and sometimes more suitable alternative to the mighty first charge re mortgage. Lenders and packaging brokers alike have championed its place and have a sense of pride in the product, which if we are honest a pride perhaps not there before.
The type of client a second charge loan typically suited in years gone by were those in arrears on existing secured or unsecured credit, defaults ccjs, low incomes and/or high LTVS. Rarely would you complete a loan for a client who didn’t have any issue, perhaps the odd one who was just a victim of being in an ERC period on their first loan charge and needed to borrow out of necessity rather than any aspiration but apart from that it was the product of last resort with rates of 10% the norm. There were plenty who would fall into this category as lending volumes back then would account for. In short it was a very homogeneous demographic.
Fast forward 12 years and we now see a very different type of client benefiting from a second charge mortgage, those who could be considered medium to high net worth. We have qualified brokers operating under strict regulatory guidelines with rigid compliance processes and lenders ensuring clients only access the product if passing far stricter affordability and income requirements. A different environment all together.
As a result, lenders old and new are now offering products in line with their risk assessment of their clients. Rates at sub 3% and low-priced fixed rate options without ERCS for example. Hence the ability to attract clients of a different demographic. Higher income earners, lower ltv securities, vanilla credit profiles. All with funding requirements that are not all ways best served by a conventional re mortgage with the vast improvements to the second charge product range.
This isn’t to say that clients who have lower income, higher ltvs or more “adverse” credit profiles are not served anymore, it’s more that the second charge loan industry has evolved and now caters for a larger and more varied demographic.
You may have good reason to still have a negative opinion of second charges but I urge you on your next capital raising re mortgage to pop on to a second charge loan sourcing system or call a second charge loan packager dependent on your preference and make sure this option isn’t overlooked. Personally, I would rather debate second charges suitability and not convert an intermediary than to of not tried to influence a discussion on the products merits in the first place.
Advice is ambiguous, it won’t always be the most suitable option but in a world where claim culture is rife don’t leave yourself open by having not looked at the second charge loan alongside every re mortgage application. With the changing landscape of second charge lending you may be pleasantly surprised what you find.
Daniel Yeo, Managing Director, Specialist Finance Centre