The introduction of the Mortgage Credit Directive has helped improve understanding of this financing option and bring it into the mainstream
Customers who have unconventional modes of income or employment, or those who are locked into fixed-rate mortgages with prohibitive Early-Repayment Charges who wish to borrow at a higher loan-to-value ratio or protect an existing mortgage rate are just a few of the scenarios in which remortgaging options can often be unsuitable.
Prior to the introduction of the Mortgage Credit Directive in December 2016, low levels of product knowledge, concerns about fees and a failure to recommend second charge loans to clients were being cited as some of the primary reasons for the low volumes of business that some of the companies were generating.
In addition, procedures and levels of paperwork were also identified as contributing to the low recommendation levels among brokers, as well as a widespread inability to distinguish between situations in which seconds would be most appropriate for customers – a frustrating state of affairs.
However, the introduction of the MCD brought the second charge mortgage sector further into line with its first charge cousin. The sector has entered a new era of growth and mainstream acceptance, one defined by a renewed sense of possibility.
There have also been moves towards new and previously untapped areas of influence within the market, with growing numbers of buy-to-let landlords using second-charge loans to grow their portfolios or to fund improvements on existing properties, combined with a comparable rise in the number of customers using loans to consolidate debt.
Indeed, many people within the industry now believe that the uncertainties of a volatile Brexit and the rise in the number of adverse-credit lending scenarios that this could preface will provide an opportunity or springboard to even greater gains in the next few years – a feeling that has seemingly been strengthened by the significant rise in the number of brokers searching for default or debt consolidation options over the past few months, according to the latest criteria-activity tracker from Knowledge Bank.
We have also seen a significant uptick in cases involving home improvements where customers have been referred to us for a second charge mortgage. But are second charge mortgages on your radar for this kind of home improvement requirement? Yes, a remortgage can get the job done, but is it actually what the customer needs to get access to the funds necessary to complete their home makeover?
In our experience, home improvement loans tend to be for smaller amounts, with the average being around £45,000. A remortgage can provide the funds, but you have to ask at what cost this comes. Early-redemption charges might be applicable. Also, a higher rate on the new mortgage because of changed personal circumstances and the real possibility of moving to a capital and interest basis as a condition could result in an adverse effect on monthly cash flow. All solid reasons to question the viability of a remortgage.
Advisers have changed their approach, too. According to a survey of 600 mortgage brokers conducted by SimplyBiz in July of last year, 85 per cent of intermediaries now claim to have an ongoing involvement with the secured loan market, with 60 per cent indicating that they refer business and 25 per cent that they write the business themselves. While some might question if this reflects the overall adviser sector, there seems little reason to doubt that the figures indicate a meaningful shift in attitudes.
As we venture ever further into 2019, we can see an industry that is characterised by greater revenue and business streams, wider opportunities and regulatory safeguards and increased levels of acceptance among both consumers and advisers. In short, the future is there to be won.
Inevitably, there are still cultural, as well as embedded objections to offering second charge advice, which continue to hinder the widest acceptance of the sector.
However, I remain optimistic that the work started with the change of regulator, its insistence that customers should be made aware of a second charge option for capital raising, along with the work that Fluent and our peers have undertaken to educate and inform adviser firms will reap benefits for our introducers and, most importantly, their customers.
Tim Wheeldon is chief operating officer at Fluent Money