Tom Garratt, head of intermediary development at The Loans Engine, considers if the second charge market is set to enter a new era of larger loans.
As house prices creep up but nowhere near as fast as the everyday cost of living, UK homeowners are finding they have to raise larger sums of money in order to do the things they want.
In today’s mortgage market there are many products that are suitable for larger loans but in a world where lending criteria on the high street is restricted, UK borrowers have to look elsewhere for these top-end loans and it’s the secured loan lenders that are competing for their attention.
Attractive interest rates, less stringent requirements and the availability of much larger loan sizes has meant that in the past few months, the secured loan sector has proven to be an extremely welcome environment for those borrowers looking to raise higher sums of money.
Four of the UK’s secured loan lenders will now lend over £100,000; Shawbrook Bank and Blemain Finance will often step outside of criteria and accept a £500,000 secured loan if the deal makes sense and Nemo Personal Finance has recently expanded its maximum loan facility to £200,000. But leading the way in the larger loan stakes is Prestige Finance, who recently extended its secured loan offering to £2.5 million, allowing for the highest lending amount the industry has ever seen.
Simon Stern, director of Prestige finance said: “Not only is this a ground breaking and now award winning product, we believe that it is a very attractive proposition for both introducers and borrowers alike.
“With so many borrowers now locked into attractive mortgage deals it was important to recognise that some borrowers may need to raise funds for any number of reasons whilst ensuring that their first mortgage is not impacted.
“Providing affordability is clearly demonstrated we saw no reason to restrict the loan amount. It is though important to get across to traditional mortgage advisors and introducers the benefits of this product and even more so come April 2014 when secured loans become regulated under the FCA.”
Traditionally secured loans were seen as a way of raising smaller amounts, averaging around £25,000. But as more borrowers are finding themselves locked in to an excellent mortgage deal, we are seeing an increase in demand, especially from high net worth borrowers looking to raise capital from their property.
Here’s a typical example of the larger loan cases we’re used to seeing: a customer with a £2.45m property has a mortgage of £400,000 on a 0.6% interest-only base rate tracker. He has a provable annual income of £220,000 and needs £550,000 to clear an existing second charge and other credit commitments, which are costing him over £6,000 per month to maintain. A remortgage will mean losing his interest-only facility, adding unnecessary extra costs and as his advisor, you should be looking at a secured loan as a viable alternative.
By opting for a secured loan product, your client’s existing mortgage deal remains in place and is combined with the separate loan at a rate which could be more preferential than a remortgage rate.
Large loans are not just being taken out by professionals living in multi-million pound properties, sitting on superb mortgage deals, there are many scenarios where the need for these larger loan products would come into play. For example, a possible product to consider before a bridge.
bridging finance is expected to be settled quickly and if it isn’t, the cost to the borrower can often get more expensive than what they were originally budgeting for. For those clients who aren’t dependent on the short term aspect, going down the secured loan route could take the pressure off as borrowers can hold on to the second charge for as long as they have the property it is secured on. Plus, the rates are lower too, making a larger secured loan a more attractive possibility.
A secured loan will also be the better option for those borrowers with more complex income streams, such as bonuses or offshore incomes. What makes the secured loan lenders even more attractive is the way they assess income and the way a repayment can be structured and for these borrowers, it’s flexibility that is more important than simply securing the cheapest deal.
Secured loan lenders do not work on just multiples of income as a traditional mortgage would, debt-to- income calculations, together with the income and expenditure checks, mean a secured loan can often be available where finance initially seemed difficult to raise. Full sets of accounts are replaced by a single paged accountant’s certificate (providing the accountant’s suitable qualified) and bank statements used for confirmation of monthly pension receipts. It’s this full picture look at income, together with underwriters making the decision at lender level, which makes the secured loan route a viable option for the clients who are looking for a higher loan amount.
Advisors will really want to look into alternative options where possible, especially as there are no upfront costs on a secured loan and the early redemption charges are usually less than for a mortgage- usually one month’s interest when the customer gives sufficient notice.
Regardless of what happens in the other markets, UK Borrowers will continue to be provided with attractive rates and more flexible requirements in order to qualify for high value lending, thanks to secured loan lenders’ growing appetite for much larger loans- size really doesn’t matter.