Brexit shock fails to knock second charge lending off track

Mortgage Introducer

November 8, 2016

The second charge sector continued to shake off post-Brexit troubles, with new business volumes in traditionally-quiet August up 6% on 2015, the second edition of specialist master broker Enterprise Finance’s Second Charge Report reveals.

The report – drawing on data from the Finance and Leasing Association – shows that in July the total value of monthly second charge lending actually increased by 4% from £70m in June to £73m, post-Vote.

This continued the momentum from May and June’s post-MCD rebound. Compared to a year earlier, July’s total is comparable with the £74m observed by the FLA in July 2015. Moreover, August’s total also of £73m, 6% higher than August last year, continued that rebound.

On an annualised basis, the market has consolidated at just under £900m (£889m in the 12 months to August) of gross lending after a period of prolonged growth through 2015. This flattening reflects the period of MCD-related market restructuring, but it also puts the industry on a stronger footing for sustained, longer-term growth in future. The second charge market is in good health, though it’s too early to tell what the long-term effects of Brexit will be on the rate of growth, with months of exit talks and trade deals yet to come.

Experts say that there are several reasons why the outcome of the Referendum failed to dent an increase in second charge lending.

The economic uncertainty resulting from the vote may have encouraged more borrowers to consolidate their debts, to make their payments more affordable and to avoid potential future shockwaves.

Ahead of the referendum, consumers were increasingly dependent on unsecured debt as a source of finance, with Bank of England figures showing consumer credit had risen £1.3bn month-on-month in April.

With many borrowers already looking to secure their debts, to reduce interest payments and make monthly outgoings more affordable, some additional customers will have taken the uncertainty as a prompt to seek out a this option. And with falls in available interest rates being a feature of the market over the summer, second charges became more attractive options in July and August, and this will continue as rates below 4% have arrived on the market.

Some homeowners have also been deterred from moving house following the Leave vote, somewhat moderating continued growth residential house prices.

Harry Landy, sales director of Enterprise Finance, said: “It remains to be seen what the full impact of the vote to leave the EU will be on the second charge market, and the property market as a whole.

“Nevertheless, second charge lending actually increased between June and August, and data from the Council of Mortgage Lenders showed a similar growth in the level of remortgaging in that period, reinforced by the Bank of England’s latest data release. While would-be buyers may well be less inclined to purchase, homeowners have clearly not been deterred from accessing some of the excellent rates on the market – whether for second charge or remortgage borrowing.

“The Referendum’s fallout hasn’t come close to that of the last recession, which caused a severe liquidity crisis and a huge tightening of risk appetites. Since the vote we have seen deals continuing to go through un-impeded – which the latest data from the FLA backs up.”

The impact of the MCD

Latest data also illustrates that the sector is bouncing-back from the disruption surrounding the arrival of the Mortgage Credit Directive in late-March.

The previous edition of this report highlighted how implementation of the new regulatory regime interrupted lending in April, with a previously rapid expansion of secured lending sector dropping-off significantly.

Between March and April, second charge lending fell 41%, to £51m. However, lending recovered strongly in May, up 35% to £69m – and 17% above May 2015’s total of £59m. June consolidated on May’s rebound, adding a further 1% to the £70m discussed above.

Landy added: “The MCD’s implementation required lenders in the second charge market to make serious operational changes. The industry was therefore expecting a slowdown in lending during April.

“What the latest report makes clear, however, is that lenders were able to come back swiftly from MCD, with gross lending seeing a sharp increase in May as a result of pipelines being rebuilt. The value of lending over the past 12 months is now significantly higher than it was a year ago, as the second charge sector continues to build on its momentum and challenge conventional remortgaging.

“The MCD regulations have ultimately made the sector more efficient and suited to meeting its customers’ needs. Conversion rates are on the up, as brokers become more confident in recommending second charge mortgages for their customers.”

Looking ahead

The Bank of England’s decision to lower the base rate to 0.25% in August could give the second charge market a further boost in coming months. In search of greater stability in the wake of the Referendum, the Bank of England decided to lower rates to a new record low. The reduced base rate, along with a raft of other new measures designed to encourage lending like the Bank’s Term Funding Scheme, should make it cheaper for lenders to borrow money and facilitate their onward lending. This is already making second charge borrowing even cheaper, with rates under 4% coming to market. This will both benefit the consumer and increase activity in the sector.

Indeed, the swiftness with which second charge mortgage rates have fallen in recent years increases the opportunity for those with existing second charge mortgages, to remortgage their second charges and benefit from reduced rates, further boosting activity.

There is intense speculation that the Bank of England may choose to lower the base rate even further before the end of the year. If this was the case, second charge lending could be boosted once again.

Landy said: “The second charge mortgage market is in a position of strength with the year-end on the horizon. The industry has adapted well to the challenges that the Mortgage Credit Directive has presented, and is now in much better shape as a result. Demand for second charge mortgages remains high as a result of underlying consumer needs, and is likely to increase further as a result of the cheaper deals which are trickling onto the market, following the cut to the base rate.

“The ongoing Brexit talks mean that there is little macroeconomic certainty, and further shocks are still a possibility. However, the second charge market is in good health and is robust enough to deal with these if and when they arise.”

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