Steve Harness is commercial director at The Loans Engine
It has been an interesting few months in the second-charge market, and especially for us as a business. For too long the elephant in the room has been master broker fees, a topic most would prefer not to discuss or debate. But perhaps it’s time to grasp the nettle and be frank about the fees charged to clients by master brokers, and indeed the significant additional costs this can add to the loan.
In my view, I think it’s fair to say that the absorption of second charges into MCOB is already resulting in an unstoppable sea change in this area, albeit one that I suspect many will continue to resist until they have no other option but to move.
Indeed, it has been interesting to see the reaction from our peers and first mortgage intermediaries to our decision to do away with our all-encompassing master broker fee. We still provide free advice and sourcing but just charge a flat £295 application fee, if the customer decides to proceed. It’s an approach first mortgage intermediaries are comfortable with and has received a positive reaction from them. Our peers have been less positive and I believe that is because it’s something of a game-changer.
Now, of course, in terms of fees we have a huge schism in the marketplace and intermediaries who use master brokers are effectively having to consider the fee options available. In fact, this is one of the reasons why we adopted the fee change. Many advisers (particularly first-charge intermediaries who are new to seconds) find it incredible difficulty justifying a second-charge product to their client when it is accompanied by a fee that runs into many thousands of pounds, which when added to the loan, ends up costing much more in terms of interest payments.
And yet, as mentioned above, there is still a considerable pushback from some master brokers, who are seem to feel they can’t survive without their sizeable master broker fees. Read some of the articles around fee-charging in the seconds market and you’ll get the faint whiff of backside-covering, as attempts are made to justify, for example, why a £3,995 fee is better for the client than £295.
One prominent commentator recently suggested that loans which only charge a low, flat-rate fee, are not always better for the client than those which charge 10/20 times more. I’m still trying to get my head around this one given that, one presumes, the loan amount required would be the same, the interest rate charged would be the same (if they actually have access to the whole of the second-charge market), and therefore the payments would be the same. Only the master broker fee differs, plus of course the distorting impact of adding the fee to the loan,and charging interest on it over the full term.
Indeed, I might add to the argument, the fact that a number of master brokers only pay lip service to the notion of sourcing the entire sector for the right product, but instead polarise their business with favourite lenders. So, you may find a client not only having to pay that large fee, but also being placed with a lender offering an infinitely worse rate. Double trouble we might say – with the client over paying twice – wrong fee, wrong rate.
Add to this, the recent focus on networks and their panel of master brokers, which has even been referred to as a ‘fee lottery’. Most networks now operate a panel, but the concern has been raised about the differing fee levels charged by master brokers on the same panel. ARs choosing Master Broker A over Master Broker B may actually be making the client worse off, simply because of the costs of that additional fee, and what it means to monthly payments once the fee is added to the loan. My own feeling is that, as time goes by, networks are going to have to look very closely at the fee arrangements of their panelled master brokers, and either insist they operate a flat fee, or look to bring in those who do.
Overall, I think the summer of 2016 effectively marked a line in the sand for master broker fee levels. The ‘fee genie’ is well and truly out of the bottle, although many in the master broker sector may well wish it hadn’t been unleashed.