01 December, 2014
Demand for second charges continues to grow with lending in 2014 expected to outstrip that of 2009 – but what is driving the demand and could second charge buy-to-lets be helping to fuel the surge?
Second charge lending shot up 13% in September, reaching £58m – the largest gross monthly total since 2009.
Meanwhile there were 18,100 buy-to-let loans in September, worth £2.5bn, up 24% by volume and 32% by value on September last year according to the Council of Mortgage Lenders.
So are brokers and borrowers starting to tap into the two adjacent markets?
Around five lenders currently offer second charges, with more rumoured to be entering the market in the next twelve months.
Martin Porter, head of lending at Step One Finance Limited, estimates that second charge BTL currently makes up around 15-20% of the overall second charge market.
He says: “We are seeing a good volume of landlords who are looking to raise additional funds through their properties. It may be that they already have an attractive rate on their first mortgage and don’t want to disturb it, or their first mortgage is on an interest-only basis. Depending on their needs and circumstances a second charge mortgage can be a very sensible way of raising the necessary capital.”
The lender offers up to 85% LTV for second charge BTL and says it is flexible in its approach to underwriting.
The flexibility of the second charge market is one of the main reasons borrowers are turning to it for BTL.
Applications are usually judged based on the rental income – which must exceed the costs of the mortgage plus the second charge along with a buffer of around 20%.
Matt Cottle, director at Y3S, says it is seeing huge demand for second-charge BTLs.
He says: “If a landlord hasn’t leveraged his properties since before the credit crunch and wants to raise more funds, he needs to leverage cash to buy new properties which is where a second charge can help.”
The thousands of mortgage prisoners created by the credit crunch have also contributed to a demand for second charge BTL. It is not just first-charge mortgage borrowers that are trapped in their interest-only, or self-cert deals unable to remortgage, but BTL borrowers as well.
Steve Walker, managing director of Promise Solutions, says the demand has always been there but mortgage brokers are only now discovering that the products exist.
He says: “When you talk to mortgage brokers and tell them what you can do for them in terms of BTL they sit up and take notice – in many instances they just weren’t aware.”
He says brokers usually are not aware of the types of products on offer and that the market can cater for adverse borrowers, non UK residents and ex pats.
Will Demand Continue?
According to a recent report from Paragon Mortgages, brokers expect to see a 3% average increase in BTL business over the next 12 months.
More than half (56%) of those surveyed in Q3 also expect their levels of BTL mortgage business to remain stable over the next year. In comparison, 40% said they expect to do more BTL business, with nearly one fifth (19%) expecting there to be an increase of 6% or more.
So will this demand for BTL filter through to the seconds market?
Andrew Bloom, managing director of Masthaven Finance, says: “With BTL going from strength to strength in the first-charge sector, it is hardly surprising that it has also begun to find a ready source of funding in the second charge channel.
“We have experienced steady growth this year and there is definitely more to come in this part of the secured loan market.”
Porter also agrees and says: “I think the growth will continue. The general consensus seems to be that the second charge market is set to increase, especially if interest rates do not go up as people are predicting and buy-to-let will continue to be popular as the private rental sector continues to develop in the UK.”
Although the BTL market is not regulated, Porter says it still applies all of the same fundamental lending principles to a transaction.
“All other aspects of the loan we treat as if it were regulated and apply our responsible lending policy and rules.”
Philip George, managing director of secured lending at Shawbrook Bank, says it is seeing demand for second charge BTLs but doesn’t necessarily see it as a large growth area next year.
He says: “We are seeing steady demand for second charge BTLs, but always want to ensure there is sufficient rental coverage to ensure the first and second charge payments can be made without stress, and that the LTVs are prudent.
“Demand is coming from mainly amateur landlords who wish to use the security for a variety of purposes, without disturbing the equity in their residential property.
“I do not see this becoming a large growth area next year, although we are very happy with the business we are writing.”
The demand for BTL looks set to continue into 2015, as does the demand for second charges. Whether or not there will be
demand for second charge BTLs will depend a lot on second charge lenders and whether they decide to focus on this area. As more lenders start to enter the sector it is difficult to believe that this furrow will remain relatively unploughed.