The sector is maturing and a more dynamic market means more ways to structure the right solution for the client
The second charge market has always been known for its ability to provide solutions where mainstream lending falls short, but over the past 12 months the sector has become noticeably more dynamic.
We are seeing lenders move away from rigid, one-size-fits-all criteria and towards a far more flexible, risk-based approach to pricing, underwriting and product design.
Product innovation
For advisers, that shift is creating new opportunities. It also means that keeping up with product innovation has never been more important.
One of the clearest examples of this change is the introduction of more flexible lending structures, particularly products that allow borrowers to access funds when they need them rather than take a single lump sum at the outset.
“Lenders are increasingly looking at the full picture”
One such product is the home equity line of credit, or HELOC, which is structured as a second charge but operates more like a pre-agreed credit facility. The borrower is given an agreed limit and a flexible drawdown period, typically between two and five years. During that time, they can take funds in stages, repay them and draw down again when required.
Interest is charged only on the amount drawn down, rather than the full facility, which can make HELOC significantly more cost-effective in the right circumstances.
We are already seeing this work well for clients who need access to funds quickly or on a rolling basis. Property developers and buy-to-let investors, for example, can use a facility like this when purchasing at auction, where speed is essential.
Having a pre-agreed line of credit in place means they can complete when needed, then repay and reuse the facility for the next project.
“Keeping up with product innovation has never been more important”
It also suits clients who are carrying out home improvements over a longer period, where payments to contractors are made in stages rather than all at once.
School fees
Another area where this kind of flexibility is proving useful is school fees.
Instead of borrowing a large sum up front, borrowers can draw down each year as fees fall due, meaning they pay interest only on the money required at that time.
Over several years, that can make a meaningful difference to the overall cost.
Products like this are relatively niche in the UK but are well established overseas. It would not be surprising to see more lenders move in this direction.
Alongside product innovation, another major change in the second charge market has been the move towards rate-to-risk pricing and a more individual approach.
“Lenders are thinking more creatively, underwriting is becoming more case by case, and product design is evolving”
The arrival of newer lenders into the market has accelerated this trend. Instead of assuming that a higher loan-to-value automatically means a higher rate, lenders are increasingly looking at the full picture.
From an adviser’s perspective, that makes the process more organic. Initial sourcing may give a guide rate but, once a case goes through a decision in principle or a soft search, the final pricing can be more competitive than expected.
It also means that cases that might once have been declined outright are now more likely to be considered on their individual merits.
ERC choice
We are seeing more flexibility around product structure too.
Some lenders now offer fixed-rate products where it is possible to choose the length of the early repayment charge (ERC) period, rather than be tied to a standard five-year ERC.
That can make a big difference for clients who expect to refinance in the short term but still want the security of a longer fixed rate should their plans change.
“We are seeing lenders move away from rigid, one-size-fits-all criteria”
Overall, the common theme across the market is flexibility. Lenders are thinking more creatively, underwriting is becoming more case by case, and product design is evolving to reflect how borrowers actually use finance in the real world.
Competition between lenders is clearly driving some of this change but it is also a sign that the second charge sector is maturing.
A more dynamic market means more ways to structure the right solution for the client, and that is exactly where second charge lending has always been at its strongest.
Andy Stean is second charge mortgage specialist at Brightstar Financial
