Enterprise Finance’s latest Second Charge Report has found that the second charge mortgage market grew just 4% year-on-year to December 2016, owing to disruption caused by the implementation of the MCD and the UK’s vote to leave the European Union.
The report analyses market’s behaviour in 2016, with a particular focus on the latter half of the year. It found that the first few months of 2016 started off strongly, continuing the rapid growth trajectory that typified the sector’s performance in 2015. Indeed, in the run-up to the Mortgage Credit Directive (MCD) implementation in March, the second charge market actually hit record lending figures, posting £86m for that month alone.
However, running counter to predictions that the MCD regulations would further this growth trend – as a result of brokers now being compelled to present second charges as an option to their clients – the immediate effect of its implementation was one of disruption. Indeed, March’s record high was followed by a 41% reduction in April at £51m.
Although the sector began to show signs of recovery after this low, the UK’s decision to leave the European Union proved another disruptor, causing investors to take stock and harming the market’s recovery.
The final months of the year saw the market continue with its recovery, but not at the exceptional level of the growth forecasted by some, pre-MCD. Total lending for December 2016 was £874m, 4% higher than December 2015, but the lowest since January (£864m).
The rate of market expansion decelerated steadily throughout the second half of 2016 with 12 month year-on-year growth falling from 24% in June to 4% in December. Meanwhile 12 month month-on-month growth ranged from 1% to -1% from March onwards.
There was a significant fall in the number of second charge mortgage repossessions in 2016, dropping to 144, a fall of 37% from 2015. The rate of second-charge mortgage repossessions, as a percentage of average outstanding agreements, has fallen from 0.34% in 2009 to 0.07% in 2016.
The report said these factors reflect the progressive increase in quality of second charge mortgages being written over the last six years – a trend which the structured advice regime of the MCD will reinforce. In the second half of 2016, the average LTV of second charge mortgages written by Enterprise was just 57%, with a typical £60,000 loan sitting behind a £235,000 first charge mortgage.
Given the better-than-expected performance of the wider UK economy in the months that have followed the EU Referendum and improved range and quality of products, Enterprise forecasts that the second charge mortgage market will perform well in 2017.
Harry Landy, sales director of Enterprise Finance, said: “Overall, 2016 has been a transition year for the second charge sector. However, the market has shown its resilience, and we believe there is cause for optimism in 2017. Firstly, the quality of second charge mortgages being issued now is much improved – something reflected in the fact that repossessions are down considerably compared to 2015 – and as more brokers begin to consider second charge for their clients, we expect that we will see growth pick up again.
“The market is in a good place for the coming year, but the truth is that more brokers need to be aware of the benefits of second charge mortgages, as they are now a mainstream alternative to a remortgage or further advance. They need to understand the role second charge mortgages can play for their clients. Doing so will make sure they participate in the market and can unlock growth. We will certainly be continuing our programme of broker education to deliver that outcome.”