The second charge, or secured loan, market has been around for a very long time and in fact for many distributors, such as Solent Mortgage Services, it was and remains a primary source of revenue.
But the last couple of years have seen significant growth in secured lending, driven in part by the non-conforming mortgage market, but more so by increasing levels of consumer debt in the UK and the need for many to consolidate debts they have built up. The growth in the secured loan market has also led to greater opportunities for distribution as new entrants in the market look to gain market share and increased competition has led to product innovation.
Debt watchdog Credit Action says personal debt in the UK stood at 1.3trn at the end of February, with total secured lending accounting for just under 1.1trn. Obviously the vast majority of this debt is accounted for by mortgage lending rather than secured lending but it is the extent to which the average person in the UK is in debt that often makes a secured loan an attractive proposition.
The last 10 years have seen a huge increase in borrowing, whether it is through unsecured personalloans, credit cards, mortgages, remortgages or secured loans. Credit Action says February alone saw total consumer credit lending to individuals reach 213bn – a rise of 5.5% over the last 12 months.
Average household debt in the UK now stands at 8,793 (excluding mortgages) and 54,124 including mortgages, while the average owed by each individual UK adult is 27,856 (including mortgages). Credit Action claims Britain’s personal debt is increasing by 1m every four minutes.
It also says the Citizen’s Advice Bureau deals with 5,300 debt problems daily. On top of that, almost 300 people become insolvent each day. In the final quarter of 2006, 29,804 individuals entered into bankruptcy or an individual voluntary arrangement, representing an increase of 7.1% on the previous quarter and reaching a total of 107,288 for the year – up almost 60% from the previous year’s figure of 67,584.
And it says over six million UK consumers have taken out debt consolidation loans over the past three years to ease their debt problems.
Payam Azardi, head of marketing at The Mortgage Times Group, says the increasing indebtedness of UK homeowners has fuelled the secured loans market, as has the need to act quickly. “Consumer debt and a need for a quick option to refinance are among the biggest reasons for the growth in the secured loans market. There are options for home owners, as they will have a of a lot of equity in their property, but taking out a secured loan can be a better option than a remortgage.”
The mortgage market itself has played a part in the growth of the secured loan market in the form of higher redemption penalties which often create a barrier to remortgaging.
Darren Fry, managing director of secured loan brokers, Prestige Acceptance, explains: “If a consumer wants to remortgage they could be caught under a redemption penalty that costs them 5% in year one and reduces over five years, but that could still mean that to remortgage would cost them 5,000 or more.
“What we often say to customers is, ‘Let us take a look at your current situation and put you on a secured loan and consolidate your debts’ and then in maybe 12 months or so when the borrower is out of the penalty period, we look to remortgage them. A quick fix is probably a bad way to describe a secured loan but that is pretty much how we view them.”
There may also be other contributing factors that mean a secured loan is best advice for a customer. Fry believes remortgages still offer a better deal for consumers compared to a secured loan, but Matt Cottle, commercial director of Yes Loans, says: “If the customer has missed a payment on their mortgage it might be more difficult for them to remortgage, as the lender may apply more penalties.
“In particular, if they have a mortgage with a high street lender, remortgaging would put them onto a non-conforming rate which would mean them paying a higher interest rate – so it might be better to take out a secured loan and stay on their current mortgage.”
Secured loan interest rates have also come down significantly in the last few years. Where the average secured loan would have an annual percentage rate of 12% six years ago, secured loans are now available on an average APR of around 6.4%. Moreover, where the redemption penalty on a secured loan of 20,000 six years ago might have been around 5,000, now on the same size loan the redemption penalty is one month’s interest – equivalent to around 300.
For Cottle, this has made secured lending a much more attractive option for many consumers who want to make a big purchase, such as buy a new car, or build an extension to their home, rather than just consolidate their debts without remortgaging.
While to some extent the secured loan market suffers from an image problem in much the same way the sub-prime mortgage market used to, most lenders have some involvement in it. It is simply that some are a little more coy about such involvement.
Cottle says: “There are still some lenders that don’t want to be involved in secured lending, particularly some of the prime lenders – but many already own a secured lender. Barclays owns First Plus Financial Group, so it offers secured loans through a different guise. You also have Alliance & Leicester offering secured loans.”
Cottle claims at least three more lenders will enter “There are still some lenders that don’t want to be involved in secured lending, particularly some of the prime lenders – but many already own a secured lender”the market this year, while other lending institutions from outside the UK are considering doing so.
Part of the reason for this increased competition is that lenders do not want to lose customers by not being able to offer them a secured loan as an alternative to remortgaging. And the effect of new entrants coming to market has meant both an increased likelihood of regulation under the Financial Services Authority and increased distribution opportunities.
As Cottle says: “A secure lender will always require volume. As the market develops they may be able to get some of that through different sources, but they will always need good distribution to give them the volume they need.”
And in case proof of this were needed, Premier Mortgage Services, which has thus far steered clear of the secured loan market, recently admitted it is taking a very cautious look at the possibility of entry. Meanwhile The Mortgage Times Group entered the secured lending market last year with one underwriter, and “Secured loans used to be a dirty word for brokers in the same way as sub-prime used to be, but now everyone wants to get involved in it”Azardi says the group now has 10 secured loan underwriters and 15 lenders on its panel. He adds: “As bigger providers are getting into the market it is just going to get better and better, and the margins are still there for the brokers and lenders to make money.”
Moreover, Trigold is expected to announce shortly that it has developed a sourcing system for the secured lending market, suggesting the market may have reached critical mass in terms of the number of lenders and products now available in the market.
Azardi says distributors that work with lenders on technology, marketing and training are likely to succeed in what is still a relatively small but quite clearly fast-growing market. The entrance of lenders such as Kensington and edeus to the market, says Azardi, has also meant rates are becoming even more competitive.
He adds despite the fact secured lending is regulated under the Consumer Credit Act, regulation of secured lending under the FSA would be welcomed by many currently involved in the marketplace.
“The market is expecting the FSA to get involved, and we would definitely prefer to see it regulated because then everyone is playing by the same rules and everything is transparent,” he says.
It is a sentiment echoed by Cottle, who says if regulation does come about the market may overcome the “cloak and dagger” image it has suffered from for many years.
The similarities between secured lending and the sub-prime market are not lost on Azardi, either, who adds: “Secured loans used to be a dirty word for brokers in the same way as sub-prime used to be, but now everyone wants to get involved in it.