Does the second loan industry have an image problem? The answer to this questions differs depending on who you ask. Whilst it’s widely accepted that the sector has not always been viewed in the best light, whether or not that reputation still exists today divides opinion.
Self-proclaimed consumer champions such as MoneySavingExpert’s Martin Lewis are quick to criticize the sector, portraying it as risky and a last resort. Meanwhile, those operating within the industry are adamant it is largely viewed in a positive way nowadays although they admit there is something of a hangover from the past that sways the opinion of a small minority, namely brokers.
“Historically, second charge mortgages were seen as the product of last resort for many borrowers left with no other option of raising finance”, says Harry Landy, director at Enterprise Finance. “Homeowners stuck with mortgages that carried heavy early repayment charges had no alternative but to use a second charge mortgage if they needed to access additional funds.
“Its association with sub-prime customers, meant that it was also dragged into the payment protection insurance mire. Second charge mortgages can be an extremely useful resource for thousands of homeowners in the right circumstances, but in the past they were perceived to be a product you didn’t really want to be associated with.”
Steve Walker, managing director, Promise Solutions says while there were issues in the past to suggest those problems still exist today is unfair.
“If you go back years the industry did have image problems,” he says. “It did have some toxic products and there were some operators that never should have been licensed. However, today if there is a poor image of the industry I’d say it’s mostly unfounded. Most loan brokers want to do the right thing by their client.”
The reason such an image has been able to propagate, according to most commentators, is misinformation and lack of awareness, particularly in the intermediary sector.
“I think the main reason for this is the lack of understanding for the sector,” says Bradley Moore, director of second charges at Brightstar. “If you haven’t taken the time to understand what’s available you are likely to be dismissive of it.”
As brokers’ understanding of how second charge mortgages work improves, the hope is that there will be fewer misconceptions and the overall perception will continue to improve.
“At Enterprise we have always worked hard to help educate our introducers as to the benefits of second charge mortgages and how it often represents a viable alternative to remortgaging or a further advance and this knowledge-sharing has improved the quality of referrals we receive,” says Landy. “The increased professionalism of the sector has also helped enhance its image and this will only improve further when increased regulation comes into effect next year. Far from a product of last resort, second charge mortgages now represent the first port of call in certain circumstances”.
Indeed, it’s not just increased education that has helped the sector to improve. While educating brokers of the benefits is beneficial it will only work if those benefits actually exist and much has been done over the last decade or so to ensure the sector offers a fair and cost effective alternative for borrowers, including becoming more transparent.
“In the past, the sector had issues around lack of transparency,” explains Tony Salentino, director, Complete FS. “But even before the present regulatory structure had even been thought of, the sector had already done away with the arcane ways of calculating early redemption costs as well as making the basic contract fully transparent over costs.”
The pricing of the products available is something that has improved immeasurably over the years. Today, rates start from just 4.4% making them an attractive solution for those borrowers considering remortgaging.
“Pricing is much more competitive and importantly regulation has made the process much more clear and transparent, suddenly seconds are seen as a viable alternative to a re-mortgage, not simply a fall-back position, and people are taking an interest,” says Brightstar’s Moore.
Furthermore there has been a shift in the type of borrower associated with second charge finance, something which has gone a long way towards improving the sector’s reputation. As previously stated, secured loans were traditionally seen as a sub-prime product. Following the economic meltdown of 2008 sub-prime borrowers were viewed negatively by much of the industry and so too were the products aimed at them.
Tim Wheeldon, joint managing director at Fluent Money says that is no longer the case for second charges.
“Before the credit crunch the market bias was towards non-prime customers whereas now it is predominantly based on prime customers and prime borrowing,” he says. “The industry has changed beyond recognition and more brokers are recognising the benefits for their clients.”
In fact, Wheeldon says the sector is now so transparent “it could teach its first charge cousin some lessons”. And the impending regulation will only further improve the sector’s standing.
As of March 2016 second charge lending will be brought fully under the remit of the FCA and, indeed, European regulation under the Mortgage Credit Directive. Whilst the initial handover took place in 2014, the sector is currently in an interim permissions period. The full impact of the new regulation will be felt in six months’ time when secured lending will be treated in exactly the same way as first charges.
“With the new regulatory structure due to completely bed in next year, the sector can now look forward to being on an equal footing in all aspects with other forms of residential lending,” says Salentino.
“The regulatory sheen that will come with legislation under the European Mortgage Credit Directive will formalise the process and help consumers feel more confident about taking out second charge mortgages and that the advice they have received is correct,” he says. “The fact that the firms they are dealing with are also FCA regulated is another positive step to improve the perception of second charge mortgages. Brokers have long had a more advanced understanding of the product than consumers, but these measures will allay some of their concerns too.
“When the mortgage market became regulated in 2004 we saw an improvement in standards across the board and there will undoubtedly be a similar sea change for the second charge mortgage market in 2016.”
Going forward, spreading the word about secured loans will be key, not just in terms of the success of the sector but also to ensure that brokers are meeting their regulatory requirements and considering seconds when meeting with clients looking to raise funds.
This is something the key players in the industry have been committed to for some time. Precise’s Roger Morris, for example, regularly holds workshops for mortgage brokers, outlining the uses and benefits of the products while master brokers and distributors such as Brightstar and Promise Solutions have been highly active in promoting the sector.
“We just need to keep doing what we are doing and that is to educate,” says Moore. “We run workshops and training for our introducers, and lenders have been offering academies and training for a long time now. The message is spreading and the ultimate benefactor will be the end consumer, which is great for everybody concerned.”
With a cohesive approach to education and promotion of the sector, and the industry almost on equal pegging with its first charge counterpart the future looks bright for secured loans.
“The industry shouldn’t have a bad image now,” says Promise’ Steve Walker. “The products are great. The reasons for the products are entirely valid. The key point is come next year we’re all going to be in the same boat and in every industry there are going to be good operators and bad operators. We are the same industry.”