Lenders to Look at Lending Criteria for Second Charge Loans

Michelle Tuvey Michelle Tuvey | Loan Underwriter

As you might expect, the recent Brexit vote has prompted the financial sector to re-evaluate how it does business. Their re-evaluations have extended as far as the second charge loan market, with lenders now looking at their lending criteria in light of the vote. They are watching to see how the world's markets will respond.

One of the first lenders to announce re-evaluation plans is LendInvest, a leading online lender specialising in property and property investing. They announced on 30 June (2016) that they would temporarily suspend new second charge business while they take time to examine lending criteria. Whether the suspension truly ends up being temporary or not remains to be seen.

Why the Uncertainty Exists

It is important for us to explain why the uncertainty exists in the second charge market so that our readers understand that now is not a time for panic. First and foremost, the whole premise of second charge lending is to make money available to borrowers based on the equity in their homes. For the average homeowner, that could mean borrowing tens of thousands of pounds to perform home renovations or pay for elective medical procedures. For investors, it is a matter of using the equity in one's portfolio to bankroll new property purchases.

In both cases, lenders have to look at property valuations in order to determine risk. If a lender offers a second charge deal at a 60% loan-to-value ratio based on current property valuations, the loan officer in charge of approval must weigh the risk of default against being able to recover what was loaned through a property sale. As property valuations fall, the risk for lenders goes up.

All lenders are doing right now is taking a cautious approach to see what happens on two fronts: property valuations and the UK economy in general. Providing both remain relatively stable as we work through Brexit negotiations, most lenders should go back to offering full support for the second charge market in short order. The only things that would hinder them are a second property crash and a significant recession, neither of which is likely to happen.

Just Hang Tight

Lenders announcing that they are re-evaluating their lending criteria naturally does not sit well with property owners who plan to get second charge loans at some point later this year. If those borrowers can just hang tight and wait a little while, all the fallout from the Brexit vote should blow over.

Buy-to-let property owners are in a better position should a second property crash occur because they are not relying on equity as the strength of their portfolios. Buy-to-let investing is all about rental yield. A second housing crash is not going to reduce rental prices significantly, so landlords can hold onto their properties and continue collecting rent while they wait for the property market to rebound. In the meantime, whatever second charge loans they are able to procure will help them increase their portfolios thanks to lower property prices.

Yes, lenders are re-evaluating their lending criteria for second charge loans in light of Brexit. And yes, there will be a short-term impact on second charge lending. But that impact should be neither serious nor long-term.

If second charge loans are in your future, just be patient and wait to see where the markets go. Shop around when you are ready to borrow to be sure you get the best deal. As long as there are borrowers looking for second charge loans, there will be lenders willing to make them.

Sources:

Mortgage Strategy ?? https://www.mortgagestrategy.co.uk/lendinvest-pauses-second-charge-lending/

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