Looking at the options
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Expand your business with secured loans
Remortgaging is no longer the obvious, ‘best’ and only option for any finance broker to advise on. Intermediaries need to diversify the products they offer to maintain and increase profitability, reduce acquisition costs and increase their return on investment. Secured loans will be essential to the solutions they can offer to the client. Residential secured loans are an obvious enhancement to their product portfolio.
However second charge bridging loans and commercial secured loans must also be added to ensure market coverage and to maximise opportunities. With greater uncertainty surrounding the mortgage market, and competition in the non-conforming mortgage sector in particular increasing, now is the time for finance brokers to review their strategic plans and evolve with the finance market.
The unsecured consumer credit and re-mortgage markets have boomed in recent years, but the fact is that secured lending has outpaced both, and has been the fastest growing market over the last five years.
The secured lending market, on average, has increased well over 50 per cent a year since 2000, growing from approximately £6.4billion in 2000 to £32.6 billion in 2004 and currently accounts for over 11 percent of the total mortgage market.
Credit card debt, unsecured loans and overdrafts – in fact, consumer debt overall is still riding at an all time high. Low interest rates have encouraged more borrowers to consolidate existing debts and benefit from lower monthly payments and this has, without doubt, boosted the second charge market. It is reported that approximately 50 per cent of borrowers who are looking for an unsecured loan are turned down by high-street banks, which further highlights the level of consumer debt in the UK.
Bad debt provisions by many of the major banks have risen by around a fifth; all of which means those clients looking to get a loan or credit will now find it more difficult to obtain from the mainstream lenders. Banks have recently implemented several initiatives to prevent defaults on cards and are now turning away half of all credit card applications. The majority of the finance required will be less than £50,000, so secured loans are a suitable alternative.
Subsequently, an increasing number of astute finance brokers, who have never considered offering a secured loan product, are adding them to their portfolio. Unlike some finance brokers, where a remortgage is often the first and only advice offered, these more informed finance intermediaries are recognising the benefits of using the second charge option and its potential.
A more feasible option?
Often a second charge is a more feasible, and better option when the finance broker considers the current credit and financial status of their client, their affordability, the amount, purpose and term for which the loan is required and importantly, the total amount the client will repay over the period. Remuneration is also a key consideration for the finance broker. What may be a surprise to some is that a small secured loan can often provide a larger income than a medium to large remortgage, while providing the ideal solution for their client.
The decision for the finance broker, therefore, is whether to advise their client to take out a second charge or remortgage them.
- c Secured loan – a loan secured on property (or land) – can offer many advantages over a remortgage deal. These can include:
- c Quicker – most can be completed within three to 21 days from the client’s initial application as opposed to six to eight weeks for a remortgage. Cheaper fees/costs – no up-front fees, valuation or solicitors costs for the client.
- c Convenient – no restrictions of purpose.
- c Acceptance – typically a one page application form and an immediate ‘in-principle’ decision as opposed to a mortgage application form of up to 20 pages.
- c Interest – is only charged on the additional amount compared to the new rate being applied to the whole mortgage balance – many remortgages are for clients whose credit rating has declined, so they will usually be re-mortgaged onto a higher rate as they are viewed as an increased risk.
- c Term – can be taken over periods from as short as 36 months or as long as 25 years.
- c Client’s age – often remortgages have age restrictions, however some secured loans are available with no maximum age limit.
- c Self declarations – can be accepted for a secured loan or remortgage and some secured loan lenders accept self-declarations with no proof. DSS and pension benefits – are accepted by specialist secured loan companies as part of the client’s income.
- c DSS paying interest on mortgage – again some secured loan lenders provide second charges in these instances.
- c Bankruptcy – specialist secured loan companies provide facilities as soon as the client is discharged and if it is a Pending Action of Bankruptcy they will clear the required amount, whereas there is often a qualifying period for a remortgage.
- c Finance broker fees – these are disbursed direct to the finance broker from the lender rather than through a solicitor when applied to a remortgage.
- c Procuration fees – these vary from lender to lender, regardless of whether a secured loan or remortgage is completed. However reports show that some second charge specialists offer total remuneration on secured loans equating to a higher income for a £15,000 loan in comparison with a typical commission and fee for a £100,000 re-mortgage.
- c Payment Protection – can be sold as an additional benefit for the client to cover – life, accident, sickness, and unemployment – with an extra commission payable to the finance broker of up to 9 per cent.
With the increasing popularity of second charges, many specialist lenders have developed secured loan products creating a competitive environment where interest rates are reducing and finance broker commissions are increasing.
The market has no limitation in terms of the clients’ status. Lenders have assessed their risk as they look to capitalise on this opportunity and have chosen to provide solutions for those with excellent credit ratings ranging to those who have an exceptionally poor adverse credit history. Some lenders offer up to 125 per cent of the property value, while other lenders will accept any amount of mortgage arrears and CCJs. Bankrupts are accepted immediately as they are discharged, while clients in receipt of DSS benefits and those for whom the DSS are paying the mortgage interest are also catered for.
Certain lenders have expanded their portfolios considerably to provide the ideal solution for clients where their income, credit history, or property, does not meet the usual lending criteria of the vast majority of the finance market. They may also offer an in-house full packaging service for those finance brokers who may not currently have this facility.
Some lenders have developed ‘bypass schemes’ to improve the speed of the completion and reduce costs incurred by finance brokers, which has further aided the secured market and, in many cases, valuations are not required as ‘Hometrack real-time’ valuations are accepted instead. Mortgage references, in many instances, are not needed as the lender will accept the balance reported on a Credit Bureau search.
The demand for second charges has not only increased for clients securing loans on their residential homes but also for those requiring semi-commercial and commercial finance. This growth has led to companies developing second charge, secured term, and bridging finance loan products for the commercial sector as well as the residential market.
Second charges offer great earning potential and the ability to provide the client with a quick service and best products, with no hassle or up-front fees. By saving their clients money finance brokers will obviously develop long-term relationships for the future.
A complete product scope is now a necessity for all intermediaries. Mortgages and secured loans must compliment their panel. The full range of products from prime to heavy adverse non-conforming must be created for both the residential and commercial market sectors. Mortgages, secured loans and bridging finance must be applied to every panel. Only firms with the right vision, service, skills, lending partners and product mix will be winners in the future non-conforming market.