A recent article in the mortgage press claimed that secured loans are just increasing the country’s debt problem, but is this really the case?
As a mortgage adviser, are your clients really better off if you never talk to them about taking out a secured loan? Or is a more serious question: are you giving your client best advice if you are not also advising on secured loans?
Secured loans can be an emotive subject and there are many reasons put forward for and against them. However, if a client is properly advised there is no reason why a secured loan should put them into a debt they cannot afford. In many circumstances, a secured loan can prove to be best advice and can be more cost-effective than a remortgage.
This is where you have such an important role to play. If a secured loan will actually suit your client’s needs better or be more cost-effective than a remortgage, are you doing the best you can by your client if you don’t know anything about loans?
The responsible lenders in the market will not lend to anybody whose mortgage and loan payments exceed 40 per cent of their income – including unsecured debts. The desideratum for an adviser has to be that their client has the funds they need, at the best rates available, without facing the risk of being over-stretched and being unable to pay their commitments.
Secured loans exist to meet a need – a need for shorter term finance, quickly, often for a big purchase such as an extension, a loft conversion, a car or even a wedding. The reasons are as varied as the clients that we all see and over recent years, the secured loan market has adapted to accommodate the myriad of different needs your clients have.
Debt consolidation is another growing reason for a secured loan. This is not adding to the debt problem but giving clients the best rate available for the debts they already have. As all advisers will know, the best rate may not be the lowest headline rate in the market at that time; often lower charges or a shorter term will prove to be much more cost-effective. This is where a secured loan could come into its own as it nearly always works out more cost-effective for your client to pay off a loan over a three or five-year period, if they can afford it, than over a 20-year period if added to their mortgage.
The upfront fees with a secured loan will also be lower as often they carry little or no administration fees other than the cost of a survey.
Of course, there are many times where adding the debt to your client’s mortgage would be the most cost-effective option, but the mortgage carries high redemption penalties. Adding a few thousand pounds in penalties will be expensive, no matter how low the initial rate is, so providing your client with a secured loan can provide a short-term option until they reach the end of their redemption charge period and then the loan can be redeemed and the amount incorporated into the mortgage.
The lack of upfront fees on a secured loan can mean that this is an affordable option, as even paying 2 or 3 per cent more for three years could cost less than mortgage redemption penalties.
The advantage for you in these circumstances is that while you are saving your client money, you also get two procuration fees – once when you sort the loan and once again when you remortgage them.
If the government’s move to encourage more long-term fixed rate mortgages comes into effect, the need for secured loans will increase as the redemption penalties on a long-term mortgage will be prohibitive for many, and may well mean that a secured loan is their only option if they need to release capital from their house for home improvements or to take advantage of the lower rates that secured loans offer over unsecured.
If you are new to secured loans, it can appear daunting to deal with a completely new set of lenders and rules. Although more lenders are entering the second charge market, you will offer a secured loan to save clients money and find them the best rate, so you will need to be able to review every product in the market. Sourcing systems are starting to enter the market, but are not yet as comprehensive as for mortgages.
It could be that your best option for guidance, and to access the whole market, is to use a master broker in the same way you would use a packager for complicated mortgages.
If you are more confident about dealing with loans, you can treat a master broker as you would a mortgage packager; you keep all the contact with your client and the master broker packages it. If you are less confident, you can pass the full case across to the master broker and still get given a generous referral fee.
In an increasing number of cases your client may benefit by considering a secured loan. At the very least, you have nothing to lose.