As the second charge sector faces huge changes and growth, market players can have a big role in shaping the future
Three months on from the implementation of the Mortgage Credit Directive, the initial chaos has been replaced by calm.
We saw the short-term impact on the market and we know the madness of March was exacerbated by the stamp duty premium on second homes kicking in around the same time.
But we are all still here and doing business on the right side of the regulator.
That said, the long-term impact of the MCD is more interesting – and yet to be realised. We already have some clues about the market shifts that will take place as a direct result of the directive and I am willing to take a punt on what we will see change over the next 12 to 24 months.
First, the size of the seconds market will increase massively as brokers build their confidence in recommending second charge mortgages where previously they would have advised a remortgage.
This growth in volume will lead to a reduction in second charge rates, taking them closer to remortgage rates as they compete head on. Of course, it is a virtuous circle: the more rates fall, the more brokers recommend seconds over remortgages, and volumes increase again.
But greater volumes or not, someone has to take the hit for the falling rates and this is likely to be intermediaries in the form of reduced commission.
Fees will also fall when clients start to pay for valuations upfront, instead of the intermediary paying them. Second charge intermediary firms have historically taken the risk that, after paying for the valuation, the client might decide not to proceed with the loan. This has long been cited as justification for higher fees compared to those for remortgages.
By getting the client to pay for the valuation, that risk is taken away from the intermediary. But reduced risk means reduced reward and there will be further downward pressure on second charge fees as a result.
Second charge products themselves will change too, with an added level of complexity as we see the introduction of fixed rates and, as a result, early repayment charges attached to fixed-rate seconds. While this was not allowed under the Consumer Credit Act, it is likely to emerge now.
Second charge distribution will change enormously. First, second charge lenders are already beginning to provide direct-to-broker offerings to capitalise on the increased confidence in advising on seconds.
Second, the introduction of specialist sourcing systems will make it easier for brokers to compare second charge loans with remortgages, and provide an audit trail to the regulator. This will bring even more confidence regardless of whether they decide to access the products directly or through a specialist distributor.
We will also see the rise of second charge mortgage clubs. Well, why not? If the products are now on a par with remortgages, it makes sense that directly authorised brokers are able to benefit from the buying power of a club.
It is a fascinating time to be involved in the second charge sector because it is facing huge changes and significant growth, and there is no definitive blueprint as to what the future market will look like. It is up to those of us in the sector to help shape it.
Nigel Payne is managing director of TFC Homeloans