Loan Introducer casts a look over a sector currently in the midst of being overhauled by its new regulator – the FCA.
There was a time when the second-charge market was a taboo subject amongst first-charge mortgage brokers, and a product considered strictly off-limits by many in the industry.
Today’s sector is a far cry from the one prior to the credit crunch though and increasing numbers of brokers and networks are starting to view second-charges not as an option of last resort but of first choice.
As many customers struggle in vain to secure competitive remortgage deals from their mortgage lender, brokers are turning to the seconds’ market to fill the gap and in so doing giving second-charges a second chance.
Irrespective of this growth a lot of mortgage brokers are still sitting on the fence though on deciding whether or not to offer second charges. They may however may find themselves backed into a corner come March next year when the Financial Conduct Authority forces their hand and obliges them to declare whether they are opting in or opting out of offering second-charge mortgages.
The sector is currently in the midst of being overhauled by its new regulator – the FCA.
Come March 2016, the sector will fold into the Mortgage Conduct of Business Rules, meaning all lenders and brokers will need to apply the same affordability assessments and stress tests as the first-charge market.
Second-charge loans will also need to be carried out on an advised basis.
On top of this, firms will also need to use the European Standardised Information Sheet (ESIS) when providing product information.
Critically, the most significant change for the first-charge market will be the need for firms to disclose to customers looking to remortgage that a second-charge mortgage or unsecured loan may be the best option, in the same way that they need to disclose that a further advance may be.
Mortgage brokers will not however be required to give second-charge product information or include it in their scope. They will just need to make borrowers aware that it is an option.
The question is – will the mainstream mortgage market welcome its new dinner guest to the table or choose to ignore it?
Many of the first-charge market’s hang-ups about the sector have been formed by its old guise.
Alistair Ewing, director of Blimey Loans, says the market is almost unrecognisable to the one in the credit crunch days.
“During the early part of the financial crisis, secured lending contracted to such an extent that most lenders had disappeared and the remaining products offered lending terms that were far too restrictive,” he says.
“Our market has evolved and developed considerably since those days with loan-to-values now back up to 95% for mainstream and even higher for some of the niche lenders. Lender choice is also fantastic just now with the constant price war between our prime lenders driving rates down to an all-time low.”
Several firms in the sector have marked the new regulatory era with a shift away from the phrase ‘secured loan’ and instead towards the phrase ‘second-charge mortgage’, aligning the industry further with the mainstream market.
Steve Walker, managing director of Promise Solutions, says some second-charge rates have dropped by circa 3% over the last several years and now start at 4.85%.
He adds: “Early Repayment Charges are lower and the impact of lump sum Payment Protection Insurance on redemptions has also disappeared. This means that secured loans are more often used as a shorter term facility, particularly by mortgage brokers who have their eye on a remortgage when the borrowers’ circumstances are right.
“There are now more second charge lenders than before the crunch with more product variation. Loans are now available for well over £1million and also for Buy to Lets. This all contributes to more customer choice and more options for mortgage brokers.”
One thing however Walker says is not changing quickly enough is the perception of the product.
The second-charge sector has suffered with an image problem in the past and been dubbed a product of ‘last resort’. The best way to find a second-charge loan broker was to check the pages of a tabloid newspaper or to watch daytime TV adverts. To some, it was the equivalent of today’s payday loan industry. This reputation has been hard to shift with a number of brokers in the first-charge industry still viewing second-charges as expensive and representing a gamble on the borrower’s property.
According to the Finance & Leasing Association’s latest figures though, these fears may be unfounded. The FLA’s statistics show there were only 447 second-charge mortgage repossessions in 2014, the lowest level for around six years. In the final quarter of 2014, there were 79 repossessions, down 35.8% compared with the same quarter in 2013.
Jonathan Clark, mortgage partner at Chadney Bulgin, still believes the second-charge market has a residual image problem though.
He says: “It is typically thought of as a product of last resort for self-certification customers, which comes with very high rates.” He says FCA regulation may help improve its image, but he adds: “If the regulation is heavy-handed it could stifle what is a valuable market.”
Perceptions of the market are improving nonetheless, as is evident through the latest lending figures.
Enterprise Finance’s Secured Loan Index reveals that the actual amount lent on an annual basis has increased from £609m for the twelve months to January 2014 to £779m for the year to January 2015 – a rise of almost 28%.
Bradley Moore, director and head of second charge loans at Brightstar Financial, says the more mortgage brokers understand about second charge loans, the current rates and the benefits, the more likely they are to use them.
“This in turn should lead to second-charges being considered as a normal option alongside a remortgage rather than as a last resort,” he says.
Putting them to the Test
With lending volumes up and some record low rates on offer, just what should mortgage brokers be using second-charges for?
Simon Carr, director of secured lending at Precise Mortgages, which launched into the market in December 2013, says demand is coming from customers who have been unable to arrange capital thorough either an unsecured loan or remortgage.
“Put simply the second charge was used where historically the traditional method was not available,” he says. “I firmly believe the credit crunch highlighted second charge loans as a method of capital raising simply because first mortgage criteria tightened dramatically, removing this option for many customers.
This tightening of criteria propelled the second charge to the forefront of many mortgage brokers’ minds and now offers a viable capital raising option.”
He says traditional home improvement and debt consolidation second-charge loans are still in high demand but more customers are instead using second charge loans to pay tax bills or to raise deposits for investment property purchases.
Moore says although it is seeing a record number of enquiries from brokers, not all brokers are looking at second charges alongside other refinance options.
“The impression that we get is that many brokers only consider a second-charge loan if it is not possible to get a remortgage for their client, either because the LTV is too high or a mainstream lender won’t accept the levels of adverse credit or income etc,” he says.
“I believe that some brokers are unfamiliar with second-charges simply because they have never used them before, while other brokers who dealt with second charges before the credit crunch think of second charges as a dirty word, almost associated with sub-prime. Most people in the second charge loan arena have high principles and operate by very high standards and are absolutely focused on getting the most suitable outcome for the customer.”
Moore says It is much quicker to get a second-charge loan than a remortgage and that credit scoring is often less restrictive than for many mainstream mortgage lenders – and in many cases second charge is also much cheaper.
“Rates now start as low as 4.85% whereas a couple of years ago they sat around 6.5-7%,” he says. “This means that someone with a £400,000 mortgage for example, who needs an extra £40,000, is likely to be better off getting a second-charge loan than they are remortgaging the whole amount. We just need to get that message out more clearly.”
Harry Landy, director of Enterprise Finance, says more brokers are waking up to the potential of second-charge mortgages but there are still large swathes of advisers who don’t consider them during the advice process.
“They could be doing their clients a disservice by not bearing all the options in mind – but it also robs them of a potentially valuable revenue stream” he says. “As with any brokers who haven’t diversified, it is often fear of the unknown that puts them off rather than any concern about the sector or products themselves.”
Walker agrees and says the percentage of brokers regularly using second charges is still relatively small.
He says: “Many mortgage brokers still think secured loans are for problem cases and perceive the rates to start at around 8 or 9%. One of the biggest changes in the use of secured loans is for prime clients, particularly those locked in to a low base rate tracker, interest-only or high ERC first charge.
“However many brokers are still not spotting this opportunity for their clients. This will change as the pace of regulation and education quickens towards 2016.”
The Impact of Regulation
Firms in the second-charge industry are currently in the process of applying for their full FCA authorisation.
The process of seeking FCA approval in itself is expected to rid the industry of any dead wood or firms that may not be up to scratch.
But will FCA regulation encourage more mortgage brokers to include second charges in their scope?
Carr says the clock is ticking and mortgage brokers should be preparing now for March 2016.
He says: “The FCA has stated that mortgage brokers must highlight the range of alternative borrowing choices that may be available. I would argue that to drive true customer-centric outcomes the mortgage broker should be doing this anyway.
“Mortgage brokers, I believe, have touched on second-charge loans from time to time, however the key is to make it part of their process. To ensure they have considered a second charge on every case build it in to their research and retain the result as evidence,” he says.
“The key thing to remember is that the customer is looking to raise finance – they do not know if a second charge loan, remortgage, further advance or an unsecured loan is the solution.”
Brian Murphy, head of lending at the Mortgage Advice Bureau, says although demand is relatively modest at present for second-charge loans, this is being tempered by the lack of prominence the sector currently has – something which might change once regulation fully kicks in.
Murphy believes that the sector may even see the return of some high street lenders, something which would no doubt give the sector more prominence.
He says: “I am sure the market will expand as the products become regulated and a more inherent part of the mainstream mortgage market. I also think we are likely to see other lenders enter the sector as it matures and this may even involve some high street brands not present in the second charge market today.”
Landy also believes regulation of the market may act as a catalyst for mortgage lenders to move into the second-charge space.
He says: “Anything that makes second-charge mortgages more transparent and easier to understand for the end consumer should be viewed as an opportunity rather than a threat. Indeed, with second charge mortgages coming under the same jurisdiction as first charge mortgages, we may see more brokers and lenders enter the market as its profile increases.”
Moore says the regulation of the market will only serve to encourage mortgage brokers who are already familiar with regulated loans.
“Aligning second-charges to the mainstream market will aid the understanding of this sector and assist brokers in their understanding of seconds and therefore their ability to offer all available options,” he says.
“Currently the processes that takes place for first and second-charges is very different and that only serves to confuse and leave some brokers feeling that they don’t understand enough themselves to confidently discuss second charge loans with their clients. Moving forward this will hopefully change for the better.”
Carr says the regulation of the second charge market is by far the single most significant event the industry has experienced.
“The regulation of this product under MCOB / MCD in March 2016 will align process and documents,” he says, “In essence it removes the mystique that for too long has surrounded this important sector. Consumers will be afforded the same protection offered in the first mortgage market and the introduction of the ESIS will provide clarity when comparing one offer over another.”
Walker says regulation will change the face of second-charges and new pricing models will evolve as customers are able to pay up front fees and in turn this may drive down client fees and introducer commissions.
But he adds: “For mortgage brokers there should be little practical change as they will treat a second charge loan as part of their advice process. They need to embed the good habits now rather than treat a secured loan as an unregulated product and also choose a good master broker which can support them with fast comparison quotes, compliance and audit for whichever model they adopt in their business – referral or sell it themselves.”
Passing it on
Under the new regulatory system, mortgage firms looking to refer on a second-charge loan will need to get their business models in order and make sure they know who will take on responsibility for the advice that is given. Gemma Harle, managing director of TenetLime, says lenders in the second-charge mortgage space tend to only engage with master brokers, as that is the only route to market right now.
“As a network we are now looking at secured loans to make sure that when they become regulated under MCOB, we are able to provide the right level of guidance to our advisers,” she says.
Harle however says there is not a huge amount of demand for second-charges.
She says: “This is principally because brokers are not looking for it, nor necessarily considering it as an option, due to such factors as high rates and the lack of a sourcing system.”
But she adds: “As lending into retirement and interest-only becomes more difficult, secured loans are being viewed as a more flexible alternative and capable of filling the gap.
“Our brokers don’t actively recommend them. Instead, they simply pass enquiries on to a master broker. They generally do not handle secured lending on an advised basis – especially as it represents such a small percentage of the overall market (£0.5bn out of an estimated £210bn).”
Moore believes that although master brokers are the ones best placed to give all of the information on the second-charge mortgage, it is the mortgage broker who will need to decide which is most appropriate option when a borrower is looking to raise additional funds.
“A master broker can give all the information on the best and most appropriate second-charge loan available from its panel and can talk to the client about their options, but ultimately it is the mortgage adviser who will need to weigh this information up against all of the other options available and decide which is the most suitable.”
Ewing however believes that the advice should be the responsibility of master brokers and packagers. It gained its FCA authorisation at the end of January and says once the market is integrated into MCOB and the Mortgage Credit Directive there will definitely be a proportion of clients who may no longer qualify for a second-charge.
He says: “In my opinion the advice given should remain with the experienced packagers and master brokers who currently occupy this space and of course who ultimately receive their FCA endorsement. I think our products are too complex for the mainstream mortgage brokers and I can’t really see them being motivated enough to get much more involved in our market than they already are. I also think that the networks and their brokers will want to and should tread very carefully from a risk perspective, despite the attractive returns available.”
Harle believes that regulation may result in mortgage brokers being able to deal direct with some second-charge mortgage lenders.
“It seems probable that brokers will be allowed direct access to lenders, rather than just having to use a master broker. Upfront fees are also likely to disappear too, making it a lot easier for brokers to become directly involved,” she says.
“Tighter controls to clearly show who is providing the advice would be a good move from a consumer perspective. And making the product simpler would help it appear on the main sourcing systems.
“Overall, I think we will see some first-charge lenders moving into the secured space. That, in turn, might mean that the traditional secured lenders will have to fight harder for distribution.”
There is no reason why the second-charge market cannot continue to grow and blend even further into the mainstream mortgage market once full regulation has been implemented next March. In many ways the next 12 months will be D-Day for not only second-charge mortgage brokers but also first-charge brokers, who will need to decide whether they are to opt in or opt out of including second-charge mortgages within their scope. It would make logical sense for mortgage brokers to offer such a service as like its own industry, second-charges will also be regulated. It will also create an extra revenue stream for brokers and networks. For some brokers though it will still be hard to see past the industry’s old image and ongoing complexities. If mortgage brokers can however open their mind and look at the deals available in the second market they may no longer put seconds in second place and find that including them in their scope is the best choice for their business and customers.