From plastic surgery to pilot lessons, second charge loans do not always need to be taken out as a necessity but can also be used to fund some of life’s ‘little’ luxuries.
According to the latest Enterprise Finance secured loan index, £75.5m was lent in March – a five-year high for the sector. Home improvements and debt consolidation may have accounted for a large chunk of this business but there are an array of other reasons customers are choosing second charges.
So does this mean that as the economy picks up more people will turn to second charges to fund some of life’s more unconventional purchases?
Living the High Life
Paul McGerrigan, chief executive of Loan.co.uk, says it has seen an increase in enquires for loans to pay for things such as cars and weddings.
“I suspect that because it has become much harder to get access to lending products via more well-known means over the past seven years, customers are looking at less well known forms of raising capital,” he says.
“Rates are also very competitive at the moment due to the doubling of secured lenders and loan products on offer.
“A combination of both these factors means that consumer awareness of secured loans is on the rise again and people are now enquiring about secured loans for a wider range of purposes,” he adds.
Working in a previous job, McGerrigan says he had customers wanting to take out loans to pay for purchases such as debenture for Wimbledon, pilot lessons and a professional footballer who wanted to buy a Ferrari.
“At the end of the day people just want to get the money they need in the simplest, lowest cost and most appropriate way they can,” he says.
Bradley Moore, director of second charge loans at Brightstar, recently had someone who needed a loan to finance their pilot’s licence training.
“Other less usual reasons have included solar panels, raising money to go on a round-the-world trip and the purchase of a classic car,” he says.
Harry Landy, sales director of Enterprise Finance, has also seen clients use loans for trips round the world and “big ticket” items such as boats.
While Alistair Ewing, director at Blimey Loans, says it has had customers use loans for: “swimming pools, a share in a helicopter and plastic surgery.”
Plastic surgery is an area where several brokers have seen demand.
Steve Walker, managing director of Promise Solutions, says: “When we used to have reps on the road a young lady applied for a loan for a boob job. This was in the early 1990’s when boob jobs were less well known and self-certification was common. She supplied a revealing portfolio of modelling photos as proof of self-employment and even asked if our rep wanted to come back and check that she had used the loan as stated. As far as I know his courage failed him and he never went back.”
Head above Water
Second-charges can also be used to give borrowers’ businesses the extra capital needed to stay afloat.
Barney Drake, operations director at Y3S Group, had a client who wanted to raise £310,000 against a Buy to Let property in order to purchase a boat, which would then be used to increase his business turnover.
“The boat would take pride of place on the River Thames route acting as a pleasure boat for tourists,” says Drake.
“The investment of this boat would effectively save the clients’ business as his current vessels were not allowed to continue using the waterways of the River Thames due to their deteriorating condition.
“To complicate matters, the applicant had adverse credit and had different sources of income which technically did not fit the lenders criteria. Due to the merits of the case in terms of equity, the lender took a pragmatic, common sense approach and agreed to lend,” he says.
“Furthermore, at the time of the application, there was significant flooding to the extent the surveyor was unable to access the property. Thankfully, the property was the only one in the street built on stilts and the surveyor was eventually able to access the property via boat in order to complete his valuation assessment.”
Drake says the customer’s business would have entered into receivership had it not been for the loan.
Another area where people are using second charges is for the funding of BTL properties.
Moore says: “We have had people who wanted to buy a plot of land to build on, to put down a deposit on a BTL, or to transfer money for a divorce settlement and of course the most common reasons – debt consolidation and home improvement.
He says: “The biggest increase in demand has been for BTL deposits. As consumer confidence increases in the property market we are regularly financing the deposit for landlords’ next investment. There is a steady stream of more unusual cases that we see each week and lenders are more widely accepting of these purposes, which ultimately means we can help more people.”
Landy has also seen a number of people wanting funds for business purposes or to buy investment properties.
“As property values have increased over the past five years, it has made more equity available and some BTL landlords are using secured loans to help this fund a deposit on an investment property.”
Drake says clients are becoming more aware of the opportunities of buying lower value properties and the rental yields available on them.
“As an investment/pension vehicle it makes complete sense to raise capital via a second mortgage, especially when considering the lowest rates, set up fees and low redemption fees that lenders now charge,” he says.
Ewing says it has definitely seen an increase in customers using second charges for BTL investments.
“These are second charges on both residential and BTL properties where clients are either using the loan to completely acquire the property or simply to leverage the deposit,” he says.
So is the market about to see more of the exotic cases or continued growth of conventional secured lending? Tim Wheeldon, joint managing director of Fluent Money, thinks the latter.
“We have a large database of cases and I have to say that contrary to the myth that people are frivolous in what they use secured loans for, the overwhelming evidence we have is for the sensible use of the facility to consolidate other debt in order to reach a manageable monthly repayment or for home improvements,” he says.
“There has been a marked increase in business now that the remortgage route has become more difficult. In so many cases, advisers are finding that a secured loan can be more compliant and efficient than a remortgage. “
Wheeldon says some of its customers have applied for loans for more exotic reasons such as weddings, school fees and buying a franchise.
But he adds: “There has not been any real evidence that secured loans are being increasingly used for that purpose. The growth in volumes is definitely because of cheaper rates, the simple transparent basis on which second charge business is built and the growing awareness among advisers that a secured loan can make more sense than a remortgage.”
Walker also says that whilst it has had the odd abnormal case, it does not see a lot of demand for these types of cases.
“The main purpose for loans as you might expect, is for home improvements, deposits for BTLs, business purposes and debt consolidation – weddings also feature fairly regularly,” he says.
As constraints in the first-charge mortgage market make it harder for borrowers to remortgage and raise extra funds, secured loans may be able to increasingly play a part in subsidising major life events and one-off purchases.
The core of second charge business will always be for home improvement and debt consolidation but as the economy continues to grow and borrowers start to indulge a little, more uncommon purchases are likely to play a part in helping to boost lending further over the coming years. Although this may well be more through broadening and capturing consumer interest in second charges than the direct volume of exotic cases.