Growing numbers of landlords are turning to second charge buy-to-let (BTL) mortgages to finance portfolio expansions, carry out home improvements or purchase run-down properties in need of renovation.
Complete FS analysed its business volumes for second charge BTL mortgages and found that after completing its first loan in 2021 and witnessing steady growth in 2022, the packager saw a sharp 60% rise from 2023 to 2024.
Furthermore, Crystal Specialist Finance says its second charge BTL business is up 10% in 2024 compared to the previous year.
But with only three lenders serving the market, brokers say there is room for more players to improve competitiveness and customer outcomes.
Protecting preferential rates
Damian Cain, director of Complete FS, said: “From March 2009 to Dec 2021, the base rate had never exceeded 1%, so buy-to-let mortgage holders had easy access to cheap funds.
“However, as rates started to rise quickly, these borrowers were faced with large payment shocks if they wanted to remortgage in order to capital-raise.”
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Using a BTL second charge means that landlords can still capital-raise while keeping a preferential first charge rate in place.
Avoiding an early repayment charge (ERC) is another reason landlords use a second charge BTL.
Jason Berry, group sales director at Crystal Specialist Finance, said: “Landlords with an existing mortgage still within a fixed rate term would typically incur early repayment charges if they chose to remortgage. We are seeing second charge mortgages used to provide a workaround, enabling landlords to release equity without incurring these penalties.”
Common misconception
Despite growth in this niche area of specialist lending, only three lenders – Together, West One and Step One Finance – serve the market.
Together’s second charge BTL lending has risen by 22% since 2022, when interest rate rises began to affect the market.
The lender, the most established in the market, says a common misconception about second charge BTLs is that they are used to access low loan sizes to fund property improvements.
Matt Kelly, senior commercial product manager at Together, said: “In fact, a common use case is for portfolio landlords to use the equity in their portfolio – effectively using it as a ‘cash machine’ – in order to purchase a new property at speed. This allows the landlord to seize the opportunity to add to their portfolio.”
He added: “Second charge buy-to-let mortgages are especially useful where the property being purchased is in need of work before it is deemed mortgageable but it has great potential and is therefore a good opportunity for the landlord.
“Our loan can be secured on the portfolio of mortgageable properties by second charge across the entire portfolio.”
But as the Bank of England base rate is lowered from 5% to 4.75%, with further cuts expected next year, would that signal the end of this flourishing market?
Berry says the product has too many uses to become obsolete.
“While a decline in interest rates could dampen demand, these products will continue to serve landlords requiring agile financial solutions and or those wishing to diversify asset classes.
“Increasing the lender pool could further benefit the market, enhancing product choice and affordability for landlords navigating an evolving property landscape,” he said.
