Industry analysis

All change for second charge

2 February 2008

Secured loans, or second mortgages, have had a chequered history. For many years they were seen as a home for applicants who couldn’t be helped elsewhere – a last resort if you like, to help a client.

That did not stop the growth of the sector though – as well as specialist secured loan lenders, many of those operating in the non-conforming mortgage sector developed significant volume in the late 1990s and the first seven years of the new century.

Then came the credit crunch and the impact has been considerable.

So what is the future for the secured loan market? The non-conforming sector is unlikely to be the driving force it was over the past decade. However there is an area of the market that is likely to grow in the coming months – lending to traditional, credit-worthy, prime borrowers.

Regulatory change

As with many of the developments in the financial world, this is driven largely by regulatory change. Unlike first mortgages, the core secured loan product is not regulated by the Financial Services Authority, falling instead under the control of the Consumer Credit Act (CCA) and the Office of Fair Trading.

While the CCA has been in place since the early 1980s, it has undergone a number of revisions, with the latest due to come into force in April this year.

For secured loans, this means that:

• All loans will now be regulated by the CCA, regardless of size.
• All borrowers will now receive the same level of protection, which includes full disclosure of financial information and a suitable cooling-off period, allowing them to weigh up all their options fully before signing.
• The maximum settlement penalty a client can be charged should they wish to redeem the loan is set at one month’s interest, with the client being required to give 30 days notice of settlement.

Taken together with the fact that upfront fees and charges are not levied on the majority of secured loan products these changes will mean that for a large number of your potential remortgage clients the traditional further advance or new lender routes do not make for best advice – and may add significantly to the customer’s total cost of borrowing. Typical examples where this would be the case include:

• Where the client has purchased a first charge product with a tie-in period comprising early redemption charges either during the offer period or after its expiry.
• Where a client’s circumstances have changed since the first mortgage was granted. Momentary blips in a customer’s finance may mean that a remortgage would require them to move a large balance from a high-street lender to a specialist – with a significant rise in rates. A secured loan for the additional borrowing requirements will allow the existing borrowing to remain at a lower rate.
• Where a client wants a medium-term deal with the intention of repaying within the first five years. A secured loan will minimise the costs incurred.
• Where speed is of the essence, a secured loan is straightforward to arrange with no need for solicitors or much of the legal work required for a remortgage.

Change in economics

A combination of regulation and competitive pressure has also seen a significant change in the economics of the market in the last year, thanks to major developments in the sale of insurance products.

Traditionally dominated by lump-sum, single premium products linked to the loan with terms of five years, there have been moves to make the products cheaper and more transparent. 2008 is likely to see further moves towards debundling of the insurance from loan itself – with more lenders moving towards monthly products.

Secured loan brokers are also very different to their forebears. While some are household names thanks to their advertising, there are also a number of local or regional firms who specialise in providing introducers in their area with a bespoke service – recognising that in the new, post-credit crunch world holding on to satisfied introducers and meeting client’s expectations is the way to go.

Some companies also offer the client a range of alternative products such as unsecured personal loans, ensuring that the introducer can be sure their every avenue will be explored to find the client a suitable product.

As an introducer you will want to find a broker that works well for your business – basing your decision not only on the commission paid but also the support they offer you and the way they treat your clients

So what does 2008 hold in store for the secured loan market? It is difficult to predict but further moves away from the non-conforming market are certain.