There can be no doubt that the future of the secured loans industry is as heavily reliant on the housing market as mortgages. However, what surprises me is how long it has taken for the mortgage industry to realise how close an ally the secured loan has become. In essence, the two share the same customer and while there are increasing signs of change, co-operation has been a long time in coming.
The reasons for this are complex but, in the most part, it can be attributed to the housing market over the past 20 years and the way in which the secured loan industry was introduced into the UK economy.
Back in the 1980s, house prices soared and consumer spending was strong. Secured loans were becoming available but while some of the bigger companies trading today were formed at this time, their market penetration was limited. The housing boom, however, was not to last, and the next decade saw many people suffering negative equity or worse, repossession. This era spawned a new type of customer – the conscientious, financially aware but overstretched family man who, for the first time, was facing a poor credit history.
By the turn of the century, when the housing market was getting back onto its feet, the return of positive equity represented, for many, the opportunity to clean the slate. Mortgage lenders welcomed growth in housing sales and as more and more people came through their doors, consumers were able to remortgage themselves into a new home and out of trouble.
But where financial difficulty had taken its toll, remortgaging was not always feasible. And so the financially impaired homeowner turned to secured loans. As property valuations began to rise, enterprising new lenders realised they could retain the integrity of a first charge mortgage by lending against the bolstered equity in the home, thus preserving the financial efficiency of existing mortgage repayments, and at the same time relieving pressure on household finances.
At this point, it would have seemed inevitable that mortgage providers should embrace secured loans as a marketing opportunity, allowing them to strengthen the relationship with customers they had been unable to help. But again the timing was not quite right.
The fly in the ointment this time was the perception secured loan providers didn’t know how to handle customers. For many mortgage intermediaries the early secured loan packages were associated with heavy ” In addition to holidays and cars, homeowners now raise funds for such reasons as a child’s education and funding career breaks”penalties for the unwitting borrower. Accusations of high management charges, early redemption fees and high interest rates were common. But fuelled by growing customer confidence, the secured loans industry thrived, finding its own sources of customers and developing its own bespoke routes to market. Above all, in the wake of emergency re-financing, many homeowners were calculating that the extra equity in their home could be put to use in funding lifestyle purchases.
Around this time, the UK was feeling the pressure of a new lending phenomenon, but this time in the unsecured sector. Credit cards, store cards and other types of short-term credit were becoming easier to obtain. Many borrowers, once again, found the cost of repaying their debt was higher than they could afford. And again the equity in their home was the salvation for many. By 2005, debt consolidation had become one of the highest growth areas for secured loan enquiries. Today over 40% of the applications for secured loans in the UK will be to consolidate often prohibitively expensive loans.
That said, the nature of demand for secured loans is changing. While the main reasons for taking secured loans remain predictable, there is now much more variety – in addition to holidays and cars, homeowners now raise funds for such reasons as a child’s education and funding a career break. It is no longer a niche market.
In the same way as the demand for mortgage intermediary services has flourished, so too has the demand for secured loan services. The primary expertise required by loan providers today is the capacity to search, and key competencies must be speed and choice – competitive advantage is won or lost simply in the intermediary’s ability to match a customer’s individual circumstances quickly and accurately with an appropriate product from among a wide range of lenders.
Technology has become a major factor. Organisations that have taken technology to heart and which have built systems that will seamlessly take the customer from an initial enquiry to a full application will inevitably be the winners when it comes to maximising efficiency and achieving long-term growth.
Having said that, the secured loan industry does have one more significant responsibility. While many people have benefited from the expansion in the lending industry, there have also been casualties and it is sad to see increasing numbers of people becoming insolvent through over borrowing.
Regulation is seen as a positive asset in what is considered to be a sensitive sales climate. Most firms in this sector are regulated by the Financial Services Authority even though the product itself is not. Public confidence and ethical sales practices are of highest priority to such operators, and treating customers fairly is a topical issue, subject to much internal focus and attention.
One area of criticism often directed at the secured loans industry is related to the sales of payment protection insurance. However, having been in the spotlight for a number of years and under much tighter regulatory control, the improvement in performance stands as an example of just how well the industry can respond to its critics. To achieve this, a voluntary trade body, the Association of Finance Brokers, was set up to represent the interests of secured loans in a number of areas.
As customers become more demanding in what they require from a secured loan, new products will be developed. Increased collaboration between lenders and intermediaries will encourage this to happen but there are testing times ahead and the industry is prepared for further regulatory changes.
As the UK economy continues its cycle of expansion and contraction, consumers will continue to see their property as a form of security. The success of lifetime mortgages is a recent example of individuals using their home to support their lifestyle – in this case, funding for retirement. The challenge for lenders is to provide facilities that can release this equity when funds are needed, but protect it so that it can be replenished as the economy and the individual’s financial position recover.
Greater co-operation between mortgage providers and lenders is inevitable. Under pressure to treat customers fairly, mortgage providers will either need to create their own processes for sourcing secured loans, or they will need to partner with an established provider. In an environment that is as sensitive to cost as this one, such a solution is inevitable.
Steve Teague is managing director of Click