Market conditions still ripe for second charges

After a drop off in lending during February, the second charge mortgage market rebounded in March - as the sector continues to prove popular for borrowers not wishing to disturb their first charge mortgage.

The latest figures from the Loans Warehouse Secured Loan Index, show second charge lending hit £135m in March - up 20.85% on the previous month.

February had seen an 8.79% fall in business, which was largely a reflection of some of the wider economic woes and funding constraints affecting both the first and second charge market.

March’s lending figure marked just a 6.49% fall on last year’s exceptionally buoyant market. We are currently seeing a number of factors working in the market’s favour - the first of which is mortgage rates.

Rates in the first charge market may have come down from their peak at the end of last year but they are still significantly higher than just one year ago.

As I write, the average two-year fix stands at 5.35% according to Moneyfacts. While this is down from 5.43% in October 2022, it is almost double the average two-year fixed rate of 2.86% in April 2022.

It is a similar picture in the five-year fixed rate product space, with today’s average five-year fix hovering around 5.05%, compared to 3.01% in April 2022.

For those borrowers who took out a two or five-year fixed rate in the last couple of years, a second charge may well prove to be cheaper than disturbing their first charge - especially if there is an Early Repayment Charge (ERC) to pay.

In addition to this, we are also seeing house prices hold steady. The latest Halifax House Price Index shows property prices increased by 0.8% in March and are now 1.6% higher than a year ago, meaning borrowers continue to benefit from the equity in their property.

Our own Evolution Money Second Charge Mortgage Tracker puts our average LTV at 70% for debt consolidation borrowers and 66% for prime borrowers.

Across the market, more than two-thirds of all secured loans were below 85% LTV in March, according to Loans Warehouse. Its figures show 86.73% of all lending was carried out below this threshold, with just 13.27% above 85% LTV - helped no doubt by positive house price growth.

When it comes to the reasons why borrowers are turning to second charges, our Tracker also shows debt consolidation continues to be the overriding cause, which is not unexpected when you consider the amount of unsecured lending on a monthly basis.

Figures from the Bank of England show we continue to be a nation that loves to spend on credit cards. An additional £1.4bn of borrowing took place in February, split between £0.6bn on credit cards and £0.8bn through other forms of consumer credit. Overall, this was a 7.7% increase on last year and marks the highest rate since November 2018.

While spending on credit cards fell slightly from £1.1bn in January, annually spending on plastic is up 13.1%, with the average interest rate on credit cards rising to 20.11% in February, up from 19.90% in January. As the rate on such lending increases, so too does the urgency for some borrowers to consolidate expensive debts into what may be a cheaper monthly second charge repayment.

For some borrowers, rising inflation and the cost of living crisis has not dampened their appetite for spending. While a number of borrowers are obtaining second charge mortgages for more pressing matters such as debt consolidation, there is still demand for purchases such as holidays and home improvements and we expect this to continue.

Nationwide's April Spending Report shows that non-essential spending in March was up 6% compared to last year, reaching £3.11bn, with transactions also up by 7% year-on-year.

As market conditions continue to stabilise, a second charge mortgage will continue to be the right solution for a certain cohort of borrowers and therefore represents a growing opportunity for advisers and clients.