For some mortgage brokers, no amount of positive press or lowering of rates will ever change their perception of the second charge mortgage market nor tempt them into recommending a deal to their client.
But this could be about to change if the new regulator makes it mandatory for mortgage brokers to disclose that a second charge deal may be the best option for them.
Under the Mortgage Market Review, which comes into play in April this year, if the borrower is looking to raise extra funds a mortgage firm needs to make oral or written disclosure to a borrower regarding the potential availability of a further advance.
If industry whispers are to be believed, the Financial Conduct Authority could bring in a similar ruling for second charge mortgages once it rewrites its rules for the sector and the European Mortgage Directive is implemented. The latter of these is expected to happen sometime next year.
So what will this mean for the market and could it mark a turning point for the industry, with more mortgage brokers starting to acknowledge seconds?
Ray Boulger, senior technical manager at John Charcol, believes that once the rules for the second charge mortgage market are finalised, mortgage brokers will be required to do the same for second charge mortgages as they are for further advances.
“Bearing in mind the MMR states that brokers must consider a further advance, as well as a remortgage, it would be illogical that if once the FCA starts regulating second charge mortgages it does not also impose a requirement on brokers to also consider second charge mortgages – something which good brokers already do,” he says.
Robert Sinclair, chief executive of the Association of Mortgage Intermediaries and Association of Finance Brokers, says although the rule will oblige mortgage brokers to declare that a second charge is available, it may not be the golden ticket it appears to be.
“Even if the FCA does make it part of the same rule book, all the MMR states is that a broker needs to disclose to the customer that if they are taking more money, a further advance may be available,” he says. “It doesn’t force brokers to look into a further advance.”
Sinclair says this works in a similar way to the existing rule that a mortgage broker needs to disclose to a customer that they do not offer whole of market advice and that a better deal may be available direct.
“Where the customer is going to increase their lending a broker would need to disclose to them either orally or into writing what was and was not in their scope – but they are not under any obligation to explore whether that further advance is any better for the customer,” he says. “They simply have to make them aware that the customer should consider it – I would expect seconds to be exactly the same,” he adds.
He says the new ruling could involve the FCA redefining what a further advance is under the Mortgage Conduct of Business rules, which would allow inclusion of second charge mortgages within in its scope.
Revolutionise the market
Although Sinclair does not believe brokers acknowledging second charges will revolutionise the market in itself, he does think it will put second charges on the map for many mortgage brokers who otherwise may not have looked at them.
“It could revolutionise the market to the extent that we will see lots more first charge mortgage brokers being involved in the discussion and some doing the deals themselves,” he says.
Sinclair believes some lenders are already gearing up for potential changes and making changes to their systems.
“Challenger lenders are all building fully holistic solutions so that if a customer comes along and is seeking a further advance, a remortgage, or a second charge, the lender has the capacity to do all of those within their stable,” he says.
One of the setbacks for mortgage brokers looking to advise on second charge mortgages in- house however is that the products are not displayed on sourcing systems such as Mortgage Brain and Trigold.
Sinclair says until the products become more mainstream and are displayed on such sourcing systems, second charge mortgages are likely to remain a specialist area for brokers.
Mark Lofthouse, chief executive officer of Mortgage Brain, has seen an increase in its secured loan referrals over the last 12 months but says there is not enough demand in the market at present for a true second charge sourcing system. It currently has a referral system in place with Fluent Money.
“It is technically possible to have a sourcing system for second charge mortgages, but there is very little demand from the broker community at present. However it’s certainly not something we would rule out,” he says.
Lofthouse says if the FCA were to implement such a requirement for mortgage brokers it would certainly add to the demand for a second charge sourcing system.
“We have seen an increase in our second charge referrals in last 12 months but a small percentage of the market I suspect compared to further advances,” he adds.
Paul Crewe, director of Smart Money Loans, is optimistic that if mortgage brokers were to state that a second charge mortgage is available, it would result in more mortgage brokers looking at this type of deal for the first time.
“I think we shall see a new influx of brokers using secured loans for the first time,” he says.
“I feel that those without experience with secured loans will be best served talking to specialist secured loan distributors who can do the heavy lifting and have the specialist knowledge to provide secured loan options.”
He says if the second charge industry is smart, it will see plenty of initiatives to promote secured loans and what they can provide for clients.
“It is certainly time for the industry as a whole to come together to provide that education,” he adds.
Tony Salentino, director of Complete FS, also believes the move could lead to more mortgage brokers becoming involved in the market.
“Secured loan rates are lower than ever and can often be a very attractive alternative to remortgaging,” he says.
“Demand has continued to grow and while first charge rates remain so low then opportunities will exist for brokers and lenders,” he adds.
Boulger says attitudes are changing and especially post the credit crunch..
“Prior to the credit crunch we would very rarely recommended second charge as there were very few occasions when they were best value for the client because for most cases a further advance or a remortgage would be better,” he says.
“However, there are now a significant number of people who have a first charge mortgage who can’t get a further advance, either because they are on a cheap term tracker, the lender no longer lends or they are on an interest-only deal,” he says.
“With second charge mortgages starting around 5.59 per cent which is cheaper than some lenders SVRs, if you have plenty of equity a second charge loan is not that expensive. It is important for brokers to look at second charge mortgages now – there is no need to wait for the regulator to force them to do that. Good brokers should be doing that now, and good brokers are.”
Boulger says the decision mortgage brokers have to make is a similar one to that they have had to do with lifetime mortgages, and decide whether they are going to broker the deal in house or are they going to have an arrangement with a broker who specialises in that area.
“We have referred a number of cases onto our partner Colonial Secured Loans which have been placed outside of the lender’s criteria – to do that you need a good relationship with the lender and do a decent amount of mutual business,” he says.
Not everyone is quite so confident that mortgage brokers acknowledging second charge mortgages will necessarily go hand in hand with more second charge mortgages being recommended.
David Hollingworth, head of communications at mortgage brokerage London & Country, says if a case is suitable, and a secured loan is the best advice, it will refer the borrower to a secured loan specialist. But he says more often than not the borrower is better suited to a further advance.
“We recommend second charge mortgages but don’t do a lot of business in that arena,” he says. “In some cases we would recommend a secured loan to someone whose credit file had worsened so that they would not qualify for a further advance.”
He says it would not consider advising on the deals in-house because to get to a level where they would feel competent and have the right knowledge to recommend a second would take more effort than justified by the level of enquiry they receive.
“Our clients don’t necessarily have issues with credit, so a further advance is quite often the cheaper way for them to raise extra funds. If we did find more demand then it would be something we would review,” he adds.
He believes a lot of mortgage brokers already acknowledge second charge mortgages but with the average further advance rates currently around 5.89 per cent with no fees, that is more often the better option.
Steve Walker, managing director of Promise Solutions, says if mortgage brokers are made to disclose that they do not offer seconds it will at least get them thinking about that as an option.
“A large number of brokers don’t even consider a second charge mortgage, full stop,” he says.
“It is not in their psyche and a lot of brokers only consider a second if they can’t place the remortgage – the fact that they would have to acknowledge and start thinking about a second charge must therefore be a positive step for the sector and has to be good for the client.”
He says the typical response he gets from a mortgage broker when asked about second charges is: “I’m too busy on my mortgage portfolio to start thinking about them’.
“So even though we have made the process really simple for them and will do all of the work, there are some who just say ‘that’s not my bag I do mortgages’,” he says.
“There is a section of the mortgage broker market that don’t even consider second charges. They have a perception of the products and see them as an interruption to their day.”
For those mortgage brokers that do not consider second charge mortgages or wish to know more about them, it is unlikely that having to disclose to the client that a second charge mortgage is an option would make them any more inquisitive about the market than they have been to date.
But for those mortgage brokers that are sitting on the fence, the new ruling might be what is needed to make them look at the market more in depth or form a tie with a specialist broker. It will no doubt be a slow process but one that will eventually get more mortgage brokers on side.
Walker says: “For a large tranche of brokers it will take them to the next stage so they are at least thinking about a second charge.”