Second charge lending is a part of the loans market which has remained under the radar.
But some important alterations to the way second charge lending is regulated may yet put it on the map and raise awareness of its uses among potential customers.
The Finance and Leasing Association’s (FLA) definition of second charge lending describes it as “a loan which is secured on a borrower’s property by a charge which is subordinate to any loan secured by a first (and thus higher-ranking) charge”.
Borrowers who take out a second charge or second mortgages essentially end up with two mortgages on their home.
A second charge loan previously came under the scope of the Consumer Credit Act, which itself became regulated by the Financial Conduct Authority (FCA) on 1 April 2014, having been the responsibility of the Office of Fair Trading up until then.
From 21 March 2016 the European Mortgage Credit Directive (MCD) came into effect in the UK, meaning second charge lending came within the FCA’s Mortgage and Home Finance Conduct of Business rules, putting it on a par with first mortgages.
Signs of growth?
The market has undergone a number of changes which it was hoped would lead to further growth of the industry.
Harry Landy, managing director at Enterprise Group, points out the market peaked in the run-up to implementation of the Mortgage Credit Directive in March 2016.
"Immediately thereafter, the significant regulatory change – and associated re-engineering of systems and processes for advice – led to market disruption in April and May," he notes.
"The market then bounced back and was on track for a return to growth when the EU referendum leave vote came through."
Fiona Hoyle, head of consumer and mortgage finance at the FLA, acknowledges: “The second charge mortgage market has been through a significant period of change over the last year with its move to the Financial Conduct Authority’s mortgage regime.”
But those expecting to see an uptick in take-up of second charge loans may be in for a surprise.
Instead of growing, the market appears to have slowed, with Ms Hoyle reporting in the 12 months to February 2017, second charge mortgage new business fell 2 per cent by value – from £886m to £864m.
She points out over the same period the number of new second charge mortgages fell by 10 per cent, from 21,108 to 18,929, although the average advance over that time increased by 9 per cent to £45,665.
Mr Landy observes though January fell compared with December, the market came back again in February to £76m, suggesting "this appears to reflect a market still absorbing the reality of Brexit and waiting to see likely longer term impacts".
