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Secured lending
Horses for courses
10 February 2007
Andrew Frankish considers the pros and cons of secured lending versus remortgaging
As we all know, the advent of ‘Mortgage Day’ brought about an interesting distinction between mortgagees and secured loans. The former falls under Financial Services Authority (FSA) regulation, while the latter remains unregulated. What this will mean in practice is open to speculation, but the general consensus is that many homeowners will take the secured loan route, due to simpler application procedures.
For a broker to be confident of giving best advice though, there are a number of factors that should be taken into consideration. First up, because of the simple fact that some clients’ applications may well be marginal cases, the incidence of secured loans will inevitably increase following regulation.
In fact, ease of application approval is not the only reason that many brokers now offer their clients the alternative choice of a secured personal loan. In addition to this basic point, borrowers may well discover that set up costs for some remortgages are more costly than with personal loans. Although many remortgage products currently offer free legals – a factor that is unlikely to change in the near future – some remortgage transactions still need local searches and other peripheral costs, not to mention potentially expensive valuations.
For this reason alone, there is now a huge incentive for some borrowers – not to mention brokers – to drive forward the secured loans market, as the up-front cost saving on this type of loan could be considerable. This factor is even more of a consideration when it comes to smaller loans, where the initial cost of borrowing can soon become prohibitive, in proportion to the actual amount being borrowed.
Certainly, for borrowers wishing to refinance for a larger amount, it would be prudent to consider a remortgage, where possible. After all, the overall rates available will inevitably be lower than for a secured loan. In fact, depending on the product chosen, they may well be under 5 per cent for an initial incentive period. That is a figure that no secured loan could realistically match.
Monitoring finances
The other point is that brokers should be advising homeowners of the need to regularly monitor and assess their mortgage finances. As such, capital raising or debt consolidation can be looked at in conjunction with migrating to a lower rate or more favourable product for their main mortgage. If the two events are combined, this eliminates the need for at least some householders to consider the secured loan alternative.
Of course, the counter argument to this is that, for the typical value of the average secured loan, it is often not worth the hassle of remortgaging in full, especially if there are penalties to pay to the existing lender. A simple secured loan application could see the customer getting exactly what they want, in terms of funds to consolidate existing debt or for whatever purpose, allied to a rate that is far more attractive than a typical unsecured loan.
In this respect, brokers need to be careful to direct their clients towards the most suitable loans for their needs. If, for example, the client only needs to raise £10,000, is it really appropriate to advise him or her to remortgage? In some circumstances, the answer will be ‘yes’, but in others, an emphatic ‘no’.
The urgency with which the client needs to obtain the finance is also an issue that should be addressed. In general, it is true to state that a secured loan can be processed more quickly than a conventional remortgage transaction. In a remortgage, solicitors need to be instructed, a valuation undertaken, the title deeds obtained and searches undertaken. This all takes time, as does the drawdown of funds from the lender. With a secured loan, the whole transaction can be finalised in a matter of days.
In fact, the only caveat to obtaining secured funding immediately is the need for the first chargeholder – the main mortgage lender – to supply its consent to the addition of a second charge on the title to the property. Having said that, it is very unlikely that a high-street lender would refuse such consent.
Further advance
Of course, Halifax has now highlighted another avenue for homeowners seeking to raise funds, although it’s fair to say that savvy borrowers always recognised this route as a possibility. Step forward – not for the first time – the further advance.
Traditionally, brokers have tended to shy away from recommending that their clients consider a further advance with an existing lender, on the basis that, firstly, this might not be best advice and, secondly, no commission is paid on the deal. Halifax’s move changes this latter commercial objection, as it is now paying commission on intermediary-arranged further advances.
Naturally, brokers must still ensure that their recommendation to remain with the same lender follows the principle of best advice. In this regard, however, it’s not just the rate that’s all important. Other factors, including speed of drawdown and ease of application are very significant, and can legitimately tip the balance in favour of an existing lender.
One factor that remains relevant is the fact that, if a homeowner already has a 95 per cent advance, it is unlikely that he will be able to remortgage to gain any significant funds. This can be a major consideration, especially where the borrower needs to refinance in order to consolidate debt. Many secured loan providers are happy to permit borrowing up to 130 per cent of the property’s value, as the interest charged spreads the slightly higher risk this potentially poses.
Brokers must advise their clients carefully. Never has the phrase ‘horses for courses’ been more apt than when advising on secured lending versus remortgaging.
Should second charge come first? Ian Giles, director of marketing at Kensington
The recent ‘surprise’ interest rate hike by the Bank of England suggests that the Monetary Policy Committee (MPC) is getting a bit jittery about the economy and consumer borrowing in particular. Yet there is a record level of mortgage lending, so there is still an appetite for borrowing amongst homeowners.
However, as higher interest rates bite and with the possibility of more increases, the home loan market is starting to change. For example there are fewer competitive fixed-rate deals on the market, leaving borrowers with fewer options and making the idea of remortgaging less attractive. But there will still be a lot of homeowners who want to borrow, maybe to consolidate other debts or perhaps to raise cash for home improvements.
If the traditional mortgage route does not provide the best solution for homeowners, then maybe they should consider a secured personal loan. Although traditionally considered the option of last resort, secured personal loans have come on apace in the last few years. The sector’s reputation has improved, a whole host of new lenders have entered the market – often from the first charge mortgage scene – and some truly innovative and competitive new products have been launched.
In the past many brokers have argued that a remortgage is usually the best bet for a homeowner, but there are circumstances where a modern second charge loan could be better suited. It makes sense for intermediaries to understand these products, as well as being in-keeping with the FSA’s treating customers fairly (TCF) principles.
Take for example the customer who is midway through a fixed mortgage deal and needs to borrow a few thousand pounds. However, remortgaging to a new product is not only going to cost in fees and charges, it also likely to come with a higher interest rate. In this situation a secured personal loan could be more cost-effective.
The same is true of a customer on a standard mortgage, but who has suffered from recent credit problems. If they remortgage they might have to go for a non-conforming product that works out more expensive than sticking with the existing mortgage and taking out a separate secured loan.
One of the innovations that the new lenders have brought to the second charge market include self-cert loans, which are ideal for the self-employed person or somebody working multiple jobs who wants to raise some money without tinkering with their mortgage.
The secured personal loan sector is worth over £6 billion annually and according to AMI around two-thirds of mortgage brokers are planning to offer secured loans soon. In addition, new legislation is due in the loan industry over the coming months, which will help to boost the image of the market even further.
All of this, along with the changes in the mortgage market, mean that not only is secured loan lending likely to continue to grow in popularity, it could also be the right choice for your clients.
A unique position - John Webster, chief executive of the Swift Group
Secured loans occupy a unique position in the mortgage market. Falling under the CCA and left out of the FSA regulatory regime, they offer mortgage advisers a highly attractive way to quickly satisfy certain client needs. Despite massive strides in the market and a sustained period of growth, the challenge facing secured loans continues to be how to encourage greater uptake from a wider range of intermediaries. Those intermediaries who are familiar and comfortable with secured loans largely specialise in this area whilst those recommending first mortgages stay within their comfort zone and seem to offer further advances or remortgaging as the only viable additional credit options. Perhaps this is due to a lack of understanding of the differences between secured loans and unsecured loans, or perhaps it is because mortgage advisers and IFAs are simply not used to including them as an option in a review of financial products. Whatever the reason, there is a missed opportunity if the average mortgage broker does not consider secured loans as an option in their product armoury. The advantage that brokers have is their client base, their existing relationships and their greater understanding of the market and the products on offer. The popularity of secured loans or second charges is founded on the lack of restrictions imposed on the funds. For many years debt consolidation was not permitted by high street lenders on further advances and many lenders still stipulate that additional monies are only used for items such as home improvement (in other words the upkeep of the lenders’ asset). With a second charge, the uses are as varied as the circumstances your clients will approach you with. It may be that your clients are committed to a holiday of a lifetime, home improvements or even next year’s school fees. Another common use for second charges is debt consolidation. This is often motivated by the speed of access to funds, a reduction in monthly outgoings and a desire to consolidate all their borrowing in one place, but a secured loan also suits clients who may be worried about suggesting to their own mortgage lender that they are experiencing financial difficulty. So, in what situation would you reach for the secured loan rate sheet rather than review remortgage options? There are several factors which could lead you to recommend a loan rather than a more traditional remortgage: suitability, flexibility, affordability and speed. What is clear is that the use of secured loans should be targeted to meet specific needs but secured loans should not be something that are just left to the specialist broker. These loans have a place in every mortgage broker or IFA’s office for when the client’s needs fit the profile. This is not a difficult product to add to your portfolio, but when clients require low costs and speed it is wrong to withhold this option from them. You do not have to become a specialist overnight, just think of this as adding another string to your bow.