From the perspective of an outsider, albeit one that was immersed in the second charge market for 15 years up until 2010, it’s fascinating to read industry comments suggesting that the sector has reinvented itself since coming under FCA rule in 2014, that the industry is unrecognisable compared to its former self and that there has been a rapid pace of change in recent years.
It’s fascinating because, in all honesty, there is so much that simply doesn’t appear to have changed since 2007. Yes, some lenders have disappeared into history whilst new lenders have emerged but broadly speaking the numbers, with around 15-20 key second charge players, have remained remarkably consistent with 2007 levels. Contrast this to the proliferation of bridging lenders since we emerged from the Credit Crunch to the point where a handful has morphed into many 100’s.
The prevailing economic conditions mean that demand is now very strong from clients seeking to leverage the equity in their property. Without disturbing their fixed rate mortgages, they are now using second charge loans to consolidate debt and fund home improvements. Beyond this there are a wide range of other uses from financing individual events like a wedding to injecting money into a business, from funding a child’s education to buying a holiday home. In truth this list of uses for second charge loans has barely changed in 30 years.
Back in the noughties one of the biggest frustrations for lenders was the sheer number of mortgage brokers that didn’t understand or feel comfortable recommending second charges. They frequently neglected to even mention second charge loans existed even when it was glaringly obvious that a second charge could be the best tailored solution for their client.
Of course, the introduction of the Mortgage Credit Directive in 2016 was supposed to resolve this issue by ensuring all mortgage brokers assessed second charges as an alternative to a remortgage when capital raising. What’s the old saying? Ah yes... “you can lead a horse to water, but you can’t make it drink.”
The often-repeated solution over so many years is ‘broker education’ but this must be set against a backdrop where lenders have played an active role in dumbing down many mortgage brokers by forcing them to access their products through specialist second charge packagers.
Even today industry commentators are suggesting that the new Consumer Duty rules that are about to be introduced will miraculously ensure mortgage brokers start offering a comprehensive range of solutions, including second charges. Yet again optimism seems to be triumphing over the likely reality.
Frankly, it’s amazing that so many facets of the second charge market really haven’t changed. Average lifespans for loans are still way below their contractual term, a focus on the customer journey, technology and automation remains unchanged, niche products are vaunted but still elusive and service levels, of course, remain key. Lenders still seem to see three or four conversions from every 10 enquiries (a level bridge lenders can only dream of!) and the “path of least resistance” is as popular today as it was 20 years ago.
So, what has changed in the last 20 years? Well, completion volumes are not what they were. Before the Credit Crunch monthly completions were nudging towards £500m a month whereas now they are languishing at around £130m a month. At the time of writing the Finance & Leasing Association (FLA) has just confirmed new business value and volume were down 14% in July thanks to “cautious consumer sentiment given the current economic environment.”
Of course, it's a tough market and that’s likely to be reflected in the annual volume figures. Some old industry lags will argue that without the Rule of 78 to calculate redemptions and payment protection insurance to boost commissions the market is destined to remain small despite it’s evident potential. In doing so they ignore the potential for new innovative ideas to turbo charge the market.
Back in 1997 Firstplus, with a campaign fronted by the ever-youthful Carol Vorderman promoting debt consolidation ‘secured’ loans to 125% LTV, proved to be an innovative game changer. Today the market awaits that game changing moment and watches with interest to see what new products are brought to market.
There is talk of green second charge retrofitting products, of new second charge loans against buy-to-let properties, home equity lines of credit and much more besides. Innovation is coming down the track and maybe that truly big idea is taking shape somewhere? You can have all the service excellence, the use of technology and education in the world but it’s product innovation and hopefully that ‘big idea’ that means second charges are still well worth a second look…