In 2006 the secured loans market found its place in a vast number of mortgage advisers’ armouries when providing best advice to their clients. It is certain that this trend will escalate even further this year as the secured lending market becomes more and more mainstream.
For a start, there are the implications that come with a poor supply of housing against a huge demand. Traditionally many of us have stretched our finances as far as we can to buy a home, thus helping to fuel price rises. However, this has created affordability problems for first-time buyers which in turn have had an impact on those looking to move further up the property ladder.
As the family unit increases in size or as children grow up and more living space is needed, pressure builds to move to a bigger property. However, house prices have escalated over the years to such an extent that there is an increasing funding gap for those wishing to trade up and more people are forsaking moving and instead concentrating on making the best of their current home. People in this situation are looking to take advantage of rising prices by using the equity in their homes to expand or improve their house. It is also the case that potential movers can find their incomes have not increased in line with house prices and so they cannot get a sufficiently high new mortgage as they fail on income multiple or affordability calculations.
With the home improvement route, the choice of a secured loan over a remortgage to raise the finance is, in many instances best advice. By using a secured loan rather than a new first charge, people are able to bypass additional Stamp Duty, surveys, solicitors’ fees, and estate agency fees associated with moving house.
Moreover, rather than incorporating all a client’s debts into their mortgage to be paid off over a potential 25-year period, with the resulting 25 years’ worth of interest charges, it can be wiser to advise them of a secured loan where the client can choose a shorter, and often more appropriate, repayment period. The secured loan approach offers the potential for the client to reap the three-fold benefits of being debt free quicker, having fewer up-front charges and paying fewer interest payments. It is also worth noting that on regulated loans of up to 25,000, the client cannot be charged an early redemption fee of more than one month’s interest. Secured loans can also be best for clients if the first-mortgage option would place them in a high loan to value bracket where they would have to pay a higher lending charge, as a secured loan would avoid this.
Historically many intermediaries more familiar with advising on first charges have shied away from secured loans, and in mortgage distribution generally there has been limited overlap. But regulation of the first-mortgage market has sparked changes in the adviser approach and areas of distribution.
Financial Services Authority regulation has had an impact on the time frames of the advice process, not to mention the increased stringency of back office requirements. The extra regulatory burden has meant, especially for those concentrating solely on the first charge ” Secured lending could mirror development of the first-mortgage non-conforming market, bringing more choice, competition and technological development”sector, that the practice of simply looking at a remortgage option has had to be reassessed. As levels of unsecured debt continue to grow and with the increasing amount of coverage of the UK’s ‘debt mountain’ crisis by both the trade and national press, many specialist advisers have had to consider a broader range of options for their clients. And any remnants of a down-market image surrounding secured loans have all been but cast off. This has been helped by the pedigree of many of the banks or businesses now involved either directly or indirectly in the secured lending market.
The realisation that all mortgage intermediaries should embrace this sector has led to a number working direct with lenders or at least building up affiliations with specialists in order to give their clients best advice. This is leading to a shift in distribution patterns. Lenders in the first and second charge markets are increasingly separating their business model to specialise in the different sectors of the market.
As more new lenders enter the market, secured lending (especially to customers with impaired credit) could mirror the development of the first-mortgage non-conforming market which has resulted in more choice, competition and technological development, all of which will further benefit those involved in the distribution of secured loans.
In today’s consumer society where many people tend to ‘live for the moment’ rather than saving and planning for the future. Many customers are inclined to access what money is available now only to later discover the difficulty of maintaining payments. This culture of spending is reflected in the record levels of debt held in the UK, and in the growing number of people with mortgage arrears. For clients in these circumstances it is accepted that debt consolidation into a single, lower rate they can afford can be a prudent move. This is another situation where secured loans are ideal.
The secured loan market itself is developing. There are more loans available for a wide range of purposes at rates that are becoming increasingly competitive.
Mortgage advisers dealing with secured lenders will normally find their introductions are taken care of by dedicated underwriters who can provide a level of personal service which is beginning to disappear in the quest for technological solutions. And an efficient lender will normally be able to complete a loan application within days of receipt.
Sourcing systems could also play a greater role in the secured loans market. Traditionally this sector has had fewer lenders and therefore cases have been easier to place based on intermediary knowledge. But with the arrival of new lender entrants there is now a range of new products. This has made it more difficult for the adviser to use only knowledge and experience in lender selection and as the market becomes more complicated there is perhaps a need for more sophisticated means of sourcing. However, sourcing systems have not been such a good fit for specialist sectors because of the complexity of the advice process, although the output could be regarded as a useful tool when it is difficult to keep up with all the latest developments.
Trigold is looking at this area and with 24,000 first charge mortgage brokers now using the system, even if only a small proportion start looking at these types of loans as an alternative to remortgaging then this could provide a big boost for the market.
While sourcing systems can be a useful tool for brokers, when recommending the best lender there are factors even the most sophisticated sourcing systems are unable to cater for, such as service levels and lender flexibility. So it is imperative that the level of advice, in conjunction with the sourcing process, is of the highest degree in terms of judgment and skill.
As the market grows, becoming increasingly mainstream and underpinned by first class service along with competitive interest rates, mortgage advisers will inevitably place more secured loan business. Remortgaging will still play a substantial role and Swift has a thriving first-mortgage business which accommodates the needs of those customers where this product is the better choice. But 2007 could well be the year when many in the mortgage market recognise that first mortgages and secured loans should be side by side in their portfolio and not left to specialist loan brokers.
John Webster is chief executive of Swift Group