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Secured loans

There are plenty of reasons for mortgage advisers to consider the secured loans market – in fact, they could be breaking MCOB rules if they fail to do so

While most press coverage over recent weeks has inevitably focused on the effect that the first year of statutory regulation has had on the mortgage market, it is also appropriate to look at the effect that the new regime has had on services and products that are not yet regulated in the same way.

One of the fallacies about secured loans is the misunderstanding that the second charge market is not regulated. While it may not be under the control of the Financial Services Authority in the way that the first charge market is, second charges up to £25,000 are regulated by the Consumer Credit Act and there is a clear and transparent system of dealing with the customer fairly. On top of that, 14 of the main lenders in this market are part of a voluntary self-regulatory body called the Finance Industry Standards Association (FISA), which also regulates more than 200 specialist master brokers.

However, the important change has not been regulation itself but the impetus it has given to brokers to look carefully at all the options available before offering advice. The ethos of the Mortgage Conduct of Business (MCOB) rules has helped to widen the horizons of research and while, before statutory regulation, it was unlikely that many brokers would even consider looking at a secured loan when faced with a request from clients for extra funds, the fact is that brokers are alive to the value of having as wide a choice available to them from which to make a recommendation.

This is not to suggest that remortgages and further advances are not the first port of call for capital raising for homeowners but the factors behind each individual case are different and regulation has ensured that brokers must know the full circumstances of their clients' situation before they make a recommendation. Whereas before it was easy to simply reach for the remortgage script, it is now clear to many brokers that they not only have to look at all the options but also be seen to be covering all the options.

Further complications

The situation is complicated further if there are early redemption penalties on the existing mortgage or if the clients have sustained damage to their credit record or even a slight change in personal circumstances since the first mortgage was taken out. It might still be possible to get a remortgage, but no clients will thank their advisers if, by remortgaging, they might have the funds required but at the cost of greatly increasing their overall monthly expenditure. It would be far better to leave the existing loan where it is and raise the extra funds by way of a second charge.

Speed is a factor that tends to be overlooked in a compliance context. Typically, loans can complete in under 21 days, some in as little as 10 days. When clients need to move quickly and secure a purchase, then the usual concerns that govern suitability need to be tempered by the time frame in which the clients need their funds. Provided they are aware of the facts, then if speed is the primary issue, a secured loan should win every time over remortgage or further advance.

Fees charged by mortgage lenders are another area that needs to be taken into account when assessing mortgage versus loan. Mortgage brokers are aware of the costs of mortgages, including valuation and administration fees, higher lending charges and conveyancing fees. However, are they conscious that secured loans carry no upfront fees, valuation or solicitors' costs? This can make a real difference to the cost equation and is another reason why brokers should add up the peripheral costs as well as look at the headline rate.

Mortgage criteria can also be restrictive. Apart from the obvious one where clients' credit profiles have deteriorated since taking out their first mortgage, the facts are that loan criteria, particularly in the area of loans-to-value (LTVs), can be more accommodating. LTV restrictions on mortgages of 90% cannot match secured loans that in some cases will allow clients to borrow up to 125% LTV. Loan rates might lack the sophistication in terms of fixes, caps and discounts that their first mortgage cousin possesses, but rates are keen and easily understandable as an APR. Loan criteria will also allow DSS and pension benefits as part of clients' income, something that mortgage lenders are not noted for. Of course, meeting criteria and making sure that clients can actually afford it are two separate matters and clients must be totally aware of costs and consequences.

There has always been the bogeyman of early redemption penalties to fall back on when comparing loans to remortgages. Up until this year calculating early redemption charges (ERCs) on a loan was less than transparent. But now, on all regulated loans (under £25,000) ERCs are a maximum of one month's interest. Looking at penalties on mortgages and the growing culture of 'exit fees' being charged on top of ERCs, loans can be a very sensible option. The mortgage market is awash with highly competitive products and providers are struggling to make profits as a result. In order to offer the headline rates that are attractive to brokers and their clients, the only way to retrieve something from the 'giveaway' at the front end is to grab it back at the end. Exit fees recently highlighted from one lender amounted to an equivalent of 1.5% if the mortgage was £100,000 – all this on top of 'normal' ERCs. It could be argued that it also serves the purpose of deterring customers from remortgaging. If this trend continues, then there is an even stronger case for recommending loans.

Finally, there is the issue of how loans can work for those whose credit record has deteriorated since taking out a mortgage. For clients who have a mortgage with a prime lender and have had credit problems, the chances of a further advance are slim. A remortgage to another prime lender could be equally difficult.

Stepping back

Remortgaging to a sub-prime product is a retrograde step as far as clients with a credit problem are concerned. It seems amazing that it can be acceptable to recommend a remortgage in these cases where, financially, the clients are going to have to shoulder the cost of having the extra money they wanted and the existing mortgage all at a higher rate, when in reality they only have to fund the extra funds. Then there is the question of how long the clients want to borrow the extra funds for. If clients remortgage then they have no choice but to accept that they will be paying interest on that extra money for as long as they have their mortgage. They are, therefore, going to pay a lot of unnecessary interest when, with a loan, they can choose a repayment period that reflects their needs.

There is a lot of disinformation about loans, usually coming from those who have not kept up to date with advances in the secured loan market. One thing is certain – it is vital that each case for capital raising is taken on its merits. If there is a clear case for remortgaging or further advance then fine, but do not overlook the merits for considering a loan. With the increasing fees being levied on mortgages both on the front and back ends, the lack of flexible criteria in terms of LTVs, acceptable income and its proof, as well as the treatment of clients with deteriorating credit histories, it would be a foolish man who insisted that loans did not provide a viable solution to capital raising.

key points

14 of the main lenders in this market are part of a voluntary self-regulatory body called FISA.
Secured loans can be faster than remortgaging and can complete in under 21 days.
The influence of regulation has instilled a need for advisers to think outside the comfort zone of remortgaging

Source: Mortgage Solutions Magazine

 

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