If second charge is to grow, master brokers must be much more in tune with the first charge customer proposition
In the wake of the vote to leave the EU, most rational people, understandably, are looking at the increased level of uncertainty and perhaps thinking that now is not the time to make big decisions. This is especially true where those big decisions involve buying homes, which could go down in value over the next couple of years.
It is too early to say how the market is faring post-referendum because the data is unavailable. However, we should not be too surprised to see a drop-off in house purchase activity during the rest of the year.
For the remortgage sector, we may have to look at whether the Bank of England elects to make that rate-cutting decision it had suggested was coming in July but which did not materialise.
If governor Mark Carney’s latest forward guidance is anything to go by, action will be taken at last over the summer and this could mean a cut of 0.25 per cent or more.
The markets were anticipating it earlier but the rapid stabilisation of the political situation with the quick appointment of Theresa May as prime minister likely made them hold off. With inflation and growth data also due to be published in August, and the MPC always more inclined to act when it has more information to go on, I think the first cut will come in August.
Such a cut could, conceivably, provide a significant boost to the remortgage sector. That said, advisers and their clients would do well to look beyond remortgage products, especially if those clients are sitting on highly attractive, tracker-esque rates. Indeed, given that those customers are marrying up the need to refinance with wanting to be relatively risk-averse, the second charge option may be worth considering.
We are aware of the main reasons why customers tend to want to raise capital, such as the consolidation and repayment of debts or the opportunity to make home improvements. If they have decided that moving is not an option at present, they may want to take advantage of refinancing to stay put, pay off debts or get the work done that will deliver the home they want and add value to it. Given that second charge rates are currently starting from around 4.43 per cent, the option of raising the necessary money via a second charge could be attractive in the current environment.
Elephant in the room
However, if we as a second charge sector are going to be honest with ourselves about our ability to develop and grow business levels, we must confront what has been the elephant in the room for some time. It is no use wanting mortgage advisers to understand second charge products, and to genuinely make the comparison with the remortgage market, when the differences are so fundamental in one key area – fees.
Anyone who has worked in the sector will understand why we have had traditionally expensive fee models. However, in the new post-Mortgage Credit Directive environment, eventually those reasons will become redundant.
I believe we have strong, pent-up demand for second charge finance, especially if we see a surge of interest in remortgaging or refinancing after any cut in Bank base rate.
However, when advisers compare seconds with remortgages, given the traditional fee models they will be comparing apples with pears.
What the market needs most is a shift to customer-centric fee models, akin to what advisers are used to seeing with traditional remortgage set-up costs.
Advisers with clients who need to raise capital should make it their mission to search out master brokers that are on the side of the customer and that have the same agenda. These master brokers will charge three-, not four-, digit fees.
I am often asked what is a fair fee in the second charge market. My answer tends to focus on what I would be comfortable with my mother paying, should a second charge be her best course of action. I have to consider two different options: the traditional master broker fee or the new upfront application fee, like that of a typical remortgage.
When you look at it this way, the answer is obvious. Advisers need to use master brokers that are breaking the mould, and that are much more in tune with the first charge customer proposition.
Steve Harness is commercial director at The Loans Engine