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The second charge loan market has witnessed immense expansion in the last five years, but has still not caught everyone's imagination, so what for the future?

The second charge loans market has gone from strength to strength in recent years, experiencing a period of significant growth since 2000. Secured loans have increased in popularity as an alternative to remortgaging and, with the expansion of the market, its image has improved. However, suspicions about second charge loans persist and doubts have been raised as to whether the extensive growth recently experienced by the market can continue.

The secured lending market grew from £6.4bn in gross advances in 2000 to £32.6bn in 2004, an average annual growth of 50.2% a year, according to market analyst Datamonitor. However, in a report released in September, Datamonitor predicted that, between 2005 and 2009, gross advances will grow at an average of just 5.3% a year to reach £35.4bn in 2009. Datamonitor had predicted that under an optimistic scenario, secured lending would be worth £43.5bn in 2009 and under a pessimistic scenario, the market would fall to £25.4bn.

Commenting on its latest growth forecast, Paul Newey, managing director of Ocean Finance, says: "If the housing market remains as it has been in the last 12 months then I would agree with this prediction, but if the housing market picks up again, then I think there will again be an acceleration in the secured loans market too."

An examination of the market in the last 12 months indicates levels of growth have been inconsistent across the lenders in the second charges market. Julian Nutley, second mortgage director at GE Home Lending, says: "Growth has admittedly slowed this year in secured lending and second charge loans as it has across the market as a whole."

While Mark Hemingway, spokesman for Halifax, agrees: "There has been a growth but we are not talking mammoth increases."

In contrast, Southern Pacific Personal Loans (SPPL) found that compared to the same period in 2004, completions on second charge loans were up 15% in the first half of 2005 and Freedom Finance has revealed the volume of its secured lending in the last 12 months had grown by 14%.

Continued expansion

Nevertheless, lenders appear to be expecting the market to continue expanding. GE Home Lending has doubled its secured lending sales force in the last six months and SPPL is set to launch a new range of secured lending products in November. Kensington Mortgages is also considering re-entering the market following its departure in 2000 in order to focus on other priorities.

One explanation as to why the second charge loans market has experienced rapid yet variable growth is put forward by Paul White, consultant at Belgravia Insurance Consultants. White says: "While I do not think there has been a growth in secured loans in terms of demand, there has been a huge growth in supply. This has been due to various factors, chief of which is the need for brokers to find extra sources of income due to the increased costs caused by regulation."

However, even though second charge loans offer intermediaries a further source of income they are yet to embrace the product. Clear divisions exist on the suitability of a second charge loan over a remortgage. Some of the reasons cited by intermediaries favouring second charge loans over remortgages include the speed and flexibility of second charge loans and the expensive redemption fees that often exist on a mortgage deals.

"There are many reasons why a secured loan is more suitable for a client rather than a remortgage", says Lesley-Anne Creffield, principal at Morgan Peterson. "A secured loan can sometimes be the cheaper alternative. Loans are available up to 125% of the property value whereas most remortgages are capped at 90% depending on income multiples. Some clients do not want to remortgage as the additional borrowings are then tied in to the term of the mortgage whereas a secured loan can be written over any period from three years to 25 years. Generally, a secured loan is quicker than a remortgage."

Marie Kennedy, national sales manager at SPPL, adds: "Fees are not charged upfront to the customer. The absence of a solicitor in this type of transaction also reduces the cost to the customer. Interim credit problems often mean a remortgage would not constitute best advice for the borrower. The prospect of remortgaging all the debt onto one higher rate is not attractive, when a much smaller proportion of the debt can run alongside the remortgage substantially reducing the cost of borrowing to the customer."
Clearly, second charge loans offer clients experiencing difficulties obtaining additional credit an alternative means of raising capital. For those with redemption penalties on their existing loan or with an existing lender unable or unwilling to help, a second charge loan can appear to provide a viable solution to their problem. Furthermore, while interest rates on second charge loans have traditionally been high, the proposition for borrowers taking out second charge loans has improved. As a result of the abolition of the Rule of 78 in May, borrowers clearing their debt before the end of the original loan term can only be charged a maximum of two months' interest by lenders. And ever-increasing competition in the market has resulted in a wider range of interest rates on offer.

Nevertheless, some intermediaries remain strongly opposed to second charge loans. Alan Lakey, partner at Highclere Financial Services, argues: "I very rarely arrange second charge loans. Primarily because I have found it unlikely a second charge lender will be interested if I cannot obtain first charge finance. If a second charge lender will lend then usually I can find a first charge lender who is likely to be far cheaper."

Lakey adds: "I would argue most borrowers pursuing this route will not have approached an independent adviser and have either sourced it themselves from the Yellow Pages or the internet or have been misadvised by an 'adviser' lured by the high introductory fees or a lack of knowledge of the mortgage market."

Harry Katz, principal at Norwest Consultants, says: "I do not advise clients on second charge loans, indeed I actively discourage them. Why would anyone want a second charge? I am a financial adviser – that means I deal with people who have financial resources. I prefer to encourage my clients to maintain as high a level of solvency as possible. Contrary to what many seem to believe it is not our job to make lenders richer – it is our duty to try and make clients better off."

Intermediaries dealing with high net worth clients also tend to have little recourse to second charge loans. When additional finance is required by a high net worth client, remortgaging is generally preferable or obtaining a further advance from the lender if the client is within their penalty period.
Exploring the growth of the second charges market raises the question of what has fuelled this growth. According to Hemingway, increased property prices have enabled people to take advantage of equity in their houses and this has been reflected in the growth of the second charges market. Increased advertising of secured loans has also aided the growth of the market by generating consumer awareness.

The main reason behind the greater popularity in second charge loans, however, has been debt consolidation. A separate report published by Datamonitor this year cited figures from the Finance & Leasing Association (FLA) from 2003 which showed debt consolidation accounted for a total of 63.2% of total advances for secured loans granted by FLA members. It accounted for 57.2% of secured loans contracted by customers from FLA members in 2003. With UK household debt currently at record levels, it remains to be seen what impact increased household indebtedness will have on the growth of the second charges market.

FSA regulation

The image of the market remains somewhat troubled, however, and an area of concern is that second charge loans are not under the regulation of the Financial Services Authority (FSA). At present the sale of secured loans under £25,000 falls under the Consumer Credit Act while loans over £25,000 are not covered at all, although this is due to be changed when an amendment bill is passed by Parliament.
According to the Treasury, changes to the non-FSA regulated status of the second charges market are unlikely to occur anytime soon. A spokesman for the Treasury says: "The decision to bring first charge mortgages within FSA regulation was taken following thorough public consultation. The risks attached to first charge borrowing on a consumer's primary residence merited a particularly rigorous regulatory regime. There are no plans at present to bring the second charge mortgage market under wider FSA regulation."

Growth in the second charge loans market looks set to continue but it is not yet clear to what extent. And while the image of the industry has arguably improved in recent years, doubts remain among some intermediaries as to the suitability of second charge loans as a means of obtaining additional credit.

key points

The secured lending market grew from £6.4bn in gross advances in 2000, to £32.6bn in 2004.
Datamonitor predicts that under an optimistic scenario, secured lending will be worth £43.5bn in 2009.
Secured loans are available up to 125% of the property value – most remortgages are capped at 90%

Source: Mortgage Solutions Magazine

 

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