Out of the shadows
Mortgage Introducer – Loans Introducer supplement
Secured loans have been around for a long time and pre-date the specialist mortgage sector as we now recognise it. Until quite recently, however, they have been the ‘poor cousins’ to first mortgages. But this is changing, and increasingly secured loans are being talked about as the missing component in the product suites of many lenders and intermediaries.
That this has happened should not be surprising. Products do not become popular purely as a result of clever marketing. They do so because there is a need and an opportunity for them. Witness the growth of self-certification and buy-to-let as examples. The same is now happening for secured loans.
Flexible and viable
To put this into context, Datamonitor valued the secured loans market in 2000 at £6.4 billion. By 2004, it had grown to £32.6 billion and accounted for more than 11 per cent of the total mortgage market. Secured loans lending is now expected to outperform virtually all other lending areas, including the unsecured and remortgaging sectors, and is predicted to be worth £50 billion by 2009. But what has brought this growth about?
Secured loans undoubtedly offer a flexible and viable alternative to remortgaging or unsecured borrowing. They are likely to appeal to borrowers who don’t want to incur significant early redemption charges and other fees through remortgaging, or who by doing so would lose the benefit of favourable fixed or discounted rates. They also appeal to customers who have acquired an adverse credit record and are thus excluded from remortgaging or obtaining a further advance through a mainstream lender. Others may simply be loathe to pay the high interest rates associated with unsecured borrowing.
There has also been a realisation among intermediaries and lenders that making the transition to secured loans need not be a painful one. The application process is similar to that for mortgages and there are usually no fees for the customer to pay. Repayment terms are flexible – often starting at just 60 months – and interest rates are competitive and priced for risk. With average credit card rates now at 16 per cent, a secured loan can make real sense. They can also be completed far more quickly than a remortgage deal.
Secured loans are, in addition, an efficient debt consolidation tool. Demand for such products is rising as consumers begin to feel the effects of ‘credit stress’ and look to reduce indebtedness. Including mortgages, this currently stands at £24,500 for every British adult. Much of this is expensive to maintain, but financially astute borrowers will often find a cost effective solution by rescheduling on cheaper and more flexible terms.
Reputation and image
Critical to the continuing success of secured loans is its reputation and image. This has arguably been the product’s weakness and continues to be tested. But the industry is waking up to the fact that more needs to be done and is adjusting to the new regulatory realities.
On this point, the future regulation of the sector is currently a hot topic, with a growing body of opinion arguing for a single regulator of both mortgages and secured loans. This, it is said, will deliver improved efficiency and transparency. Now whether this happens soon is still far from clear, but an encouraging step has been taken by the Office of Fair Trading (OFT) and Financial Services Authority (FSA) pledging to co-ordinate activity. That the two sectors would ultimately benefit by having a common regulator cannot truly be open to dispute.
In fairness, it should be mentioned that a number of key players have sought to overcome the weaknesses in the present regulatory structure through effective self-regulation. A further step in the right direction has been taken through the formation of the Association of Finance Brokers (AFB) in alliance with the Association of Mortgage Intermediaries (AMI) and Association of Independent Financial Advisers (AIFA). This will give secured loan brokers a far more effective voice.
In the meantime, the profile and reputation of secured loans continues to improve. This has been helped immeasurably by the growing number of familiar business brands more usually associated with mortgages now offering the product. Other advancements are being made in the key areas of product design and technology. At least two major lenders, of which Money Partners is one, now offer a range of discount products in addition to variable rate loans. Secured loans are also beginning to appear more widely on sourcing systems as well as being better catered for by lenders’ interactive websites.
The future therefore looks positive. While accepting that a secured loan is not suitable in all cases, it does represent a real option in many. Sold appropriately, the product can truly add value to your proposition.