One man’s gain is another man’s loss, or so the saying goes, but is this true when it comes to the mortgage and the secured loan markets. Does the latter only perform well when the mainstream market is struggling?
The secured loan sector is currently experiencing an uplift in business, with the latest figures from Loans Warehouse’s Secured Loan Index, showing lending grew 10.2% in July – breaking the £45m barrier for the first time in nearly four years, with lenders advancing £46.3m.
Its figures are supported by the Finance and Leasing Association, whose members saw their secured loan business up 52% in June compared to the previous year – advancing £38m.
However, according to the Council of Mortgage Lenders the mortgage market has also recently started showing signs of an upturn with gross lending in July reaching its highest level in nearly four years, with lenders advancing £16.6bn to borrowers.
Many commentators have attributed the recent growth in the secured sector to events in the mortgage market and the tightening of lenders criteria, so does this mean a recovering mortgage market will put the brakes on growth in the secured loan sector? Or is it a myth that the two sectors are so closely related?
“There has been a tendency in the past to think of the secured loan market as the mortgage markets younger, slightly wayward, brother,” says Paul Crewe, director of Smart Money Loans.
“As secured loans are based on taking a second charge behind a mortgage, there is no doubt that part of the reason for the recent upturn in secured loan activity is because of the restrictive nature of remortgaging in terms of criteria; and because of the dropping of interest- only as a repayment method in some instances,” he adds.
Vic Jannels, chairman of All Types of Mortgages, agrees and says the restrictions mortgage lenders are placing on current borrowers has worked to the secured loan sector’s advantage.
“People have taken out mortgages in the past where the lender’s requirements on income may not have been as vigilant as they are today,” he says.
“So if they want to remortgage from lender A to B they potentially can’t because their income doesn’t match the new restrictions – we are finding a lot of this. Secured loans are not calculated using the normal income multiples, they fall under affordability so are more flexible,” he adds.
Crewe however believes the secured loan market does remain independent of the first charge market in times of a strong economy.
One of the highlights for both sectors was undoubtedly the years between 2004 and 2007 at the height of the credit crunch, when both sectors thrived.
But of late the secured loan market appears to have overtaken the mainstream market in terms of its growth, with many attributing this to a lack of remortgaging opportunities in the mainstream market.
“When the mortgage market contracts, secured loans do play a bigger part,” says Martin Reynolds, chief executive of SimplyBiz Mortgage Club.
He argues though that the current uplift in secured loan business is not necessarily linked to borrowers not being able to fit in with lenders’ current criteria but is more to do with the products lenders offered historically.
Many secured loan lenders are benefitting from products mortgage lenders released several years ago.
In 2007 it was not uncommon for lenders to offer lifetime trackers as low as 0.39% and in some cases lower.
“A lot of the current business we are seeing is nothing to do with borrowers’ lack of credit worthiness,” says Reynolds.
“These are some very high net worth individuals who realise it is more cost effective to keep their mortgage at bank base rate plus 0.39% on a lifetime tracker than remortgage and therefore take on a secured loan instead.
“This is happening a lot and is probably one of the main reasons we are seeing the secured loan market grow at a faster rate than it has previously,” he adds.
The Mortgage Market Review, which is due to be implemented in April 2014 has also been touted as a contributor to the growth in the secured loan sector.
The MMR’s requirement for all interest-only mortgages to have a credible strategy for repaying the capital and its introduction of more stringent affordability requirements for lenders means that many borrowers are finding it harder to get a mortgage than seven years ago.
“The MMR has helped the revival of the secured loan market because the reflex response among many brokers has been to reach for the remortgage option,” says Crewe.
“First charge lenders have been quick, some say too quick, to comply with their interpretation of MMR and that has led to restrictions on interest-only and self-certification in particular. Brokers now have to think carefully before pressing the remortgage button when a secured loan can in many cases be better advice,” he adds.
Reynolds agrees that the FCA’s requirements around interest-only mortgages has been a big boost for the sector.
“The interest-only part of the MMR has played a part in the growth of the secured loan sector as there are borrowers who have interest-only above 75% loan-to-value and can’t really remortgage elsewhere but still have enough equity to get a secured loan,” says Reynolds.
He says whether this a direct result of the MMR or just down to lenders’ changing criteria is probably a moot point between the two.
However, Steve Walker, managing director of Promise Solutions, thinks the MMR’s impact on the secured loans sector may have been exaggerated.
“I don’t think that it is having a big impact currently, I think it will when it is introduced but not at the moment. Brokers have been saying to us for years that they can’t place mortgages with adverse credit, can’t do self-cert – that is not a function of the MMR, that’s a function of lenders appetite to do that kind of business,” he says.
He adds: “The mortgage market is what it is: it ebbs and it flows, it doesn’t have an appetite to look at income the way secured lenders look at it. The question for me is what has really changed in the mortgage market – from what I am hearing, brokers can place more mortgage business today than they previously could – so that should hurt secured loans shouldn’t it?”
The secured loan sector has benefitted from lenders in the sector increasing their appetite of late by increasing maximum loan sizes to £200,000 and relaxing their criteria around self-employed and those with adverse credit.
Walker believes the secured loan market has itself to thank for its recent successes.
“Lenders in the sector have become are more flexible and able to write bigger loans – I think that is one of the biggest underlying reasons – the mortgage market is tough but it has been tough for a long time,” he says.
Brothers in arms
The two markets may both be enjoying a revival of sorts at present but it seems the nature of the two sectors and the type of demand the sectors are seeing should not favour one over the other.
According to the CML, lending to first-time buyers in June was up 30% year-on-year, with 25,300 loans advanced to FTBs, significantly up on the 19,400 loans advanced in June 2013.
This increase in business in the mainstream market does not pose a threat to the secured loan industry and its growth.
“I think the markets will carry on working in co-existence,” says Reynolds.
“Yes, you might get a slight slowdown in the secured loan market if the mortgage market starts to pick up but it is dependent on what lenders criteria does. If lenders were more flexible with interest-only at higher LTVs then yes, that might dent secured loan business, but I can’t see that happening anytime soon,” he says.
The secured loan sector has no doubt benefitted from some historic decisions made by lenders in the mortgage market but it does not seem reliant on this for its current growth.
“We are definitely reaching launch velocity as a sector with monthly volumes now topping £40m plus per month,” says Crewe.
“With the secured loan proposition as transparent as it is and clearly suiting a wider range of individuals wanting to raise capital, the secured loan market is going to flourish, particularly as confidence picks up in the rest of the economy. I believe that our market acts as a complementary service to the mortgage market and both are in for a renaissance.”