The secured loans boom
I would love to say that the growing popularity of secured loans was solely down to the efforts of companies like mine. However, this, of course, would be wildly optimistic, not to say downright egotistical. But it is no coincidence that companies like Loanoptions
.co.uk, which specialise in providing a fulfilment service allowing intermediaries to introduce clients for secured loan advice, have seen their business mushroom over the last 18 months.
Personally, I am not surprised at all by the success of secured loans and if you look at the factors involved, I think you will be able to agree with me. With the understanding that I might upset the ‘professional’ pundits again, I think that one of the main factors for the success of second charge loans is that the buying public understand them and that, horror of horrors, the public also recognise that regardless of the tantrums of the professionals, loans fulfil the basic requirement of allowing them to raise money for any purpose in a very simple and understandable way. At the same time, they like not having to pay for the privilege at the outset, in terms of valuations, conveyancing and product fees and other costs, which can be a staple of much remortgaging.
So if the vast majority of the population see loans as a legitimate means of capital raising and provided they are aware of all the associated costs, then regardless of the doomsayers, why can’t loans be an accepted way of capital raising in the minds of the intermediaries? Let’s face it, our clearing banks with the weight of history and reputation on their side have been selling loans to customers for years and I don’t think anyone has ever had a go at banks for selling secured loans.
It would be disingenuous not to acknowledge the bad publicity that has accrued to the small cowboy element of lenders and intermediaries that cast a pall over the loans industry in the late 80’s and 90’s but the world has moved on and the secured loan industry is a different place. It has adapted quietly but robustly to the changes in both public sentiment and the wider regulatory imperatives, which are at the heart of ‘Treating Customers Fairly’.
The growth of secured loans should not be regarded as anything more than an opportunity for all intermediaries to revisit the arguments for and against, which, for IFAs and mortgage brokers selling first charge products, had been very negative until a short time ago.
Apart from the arguments among financial intermediaries as to whether client advice should include secured loans, the wider world is looking into the abyss of a debt nightmare and searching for solutions, while it seems the adviser world is still locked in a hand-wringing exercise as to whether loans are appropriate advice.
With a debt mountain estimated to be worth over a trillion pounds, uncertainty surrounding long-term interest rates and a slowing property market, demand for consolidation facilities is growing rapidly.
Personal debt, in the shape of credit cards, hire purchase and other unsecured debt has been expanding over the last 10 years. As the property market has expanded and house prices have increased alongside a buoyant economy, levels of debt soared. However, public sentiment is moving towards consolidation as uncertainty has grown and many have reached or exceeded their credit limits. Therefore the need for flexible finance packages to provide solutions and the expertise to meet the demand has boosted the rise of second charge loans as a real alternative to remortgaging and provided new business opportunities to brokers.
As advisers, we are all aware of the problems that people have got themselves into by relying on credit to make purchases, funding lifestyles which they cannot afford or just to get by. But we should be looking at all the alternative methods of refinancing rather than adopting a ‘head in the sand’ approach that refuses to look at the advantages offered by secured loans in the right circumstances. As many intermediaries are finding, the world does not begin and end with remortgaging and the growing acceptance of secured loans as a viable alternative among enlightened financial advisers has been central to the growth in popularity of secured loans.
However, one of the most important factors in the growth of secured loans is one I am sure no one really anticipated before it was announced, or even when it was implemented. Ironically, this is the very feature the pundits say is missing from the secured loan industry. Since ‘Mortgage-Day’, the effect of compulsory regulation on the mortgage market has been clear, but it is the positive effect it has had indirectly on the secured loan market that is a major driver in growing use by intermediaries and therefore further contributing to the overall growth of the market. At Loanoptions.co.uk, we have worked hard over the last 12 months to convince financial intermediaries that secured loans are an appropriate alternative to remortgaging and there is no doubt one of the factors which has worked in our favour has been the effect of Financial Services Authority (FSA) regulation.
Widening the horizons
However, the important change has not been regulation itself but the impetus it has given to intermediaries to look carefully at all the options available before offering advice. MCOB has helped to widen the horizons of research and while before regulation, it was unlikely that many would even consider looking at a secured loan when faced with a request from a client for extra funds, the fact is intermediaries are now alive to the value of having as wide a choice available to them as possible from which to make a recommendation.
And let us look briefly at the reasons why secured loans score over remortgaging in many circumstances:
No cost of entry – loans do not carry any legal, valuation or product fees for clients, which when put against the average remortgage, makes them more attractive.
Speed – speed is a factor that tends to be overlooked in a compliance context. Typically loans can complete in less than 21 days from application, some in as little as 10 days. When a client needs to move quickly and secure a purchase, then the usual concerns that govern suitability need to be tempered by the time frame in which the client needs their funds. Provided they are aware of the facts, then if speed is the primary issue, a secured loan will win every time over remortgage or further advance.
Poor credit – there is a real issue with clients whose credit record has deteriorated since taking out a mortgage. For clients who have a mortgage with a prime lender and have had credit problems, the chances of a further advance are slim. A remortgage to another prime lender could be equally difficult. Remortgaging to a non-conforming product is a retrograde step as far as the client with a credit problem is concerned. What still amazes me is how it can be acceptable to recommend a remortgage in these cases where financially, the client is going to have to shoulder the cost of having the extra money he wanted and the existing mortgage all at a higher rate, when in reality he only needs to pay for the extra funds. If a client is remortgaged, then he has no choice but to accept he will be paying interest on that extra money for as long as he has his mortgage. He is going to pay a lot of unnecessary interest when with a loan he can choose a repayment period that reflects his needs.
The question of why secured loans are booming is best illustrated by peripheral evidence from two different sources. At the recent Manchester Expo, the exhibitors claiming to have had a good show were those involved in secured loans. All of them, whether lender or packager, had massive interest from intermediaries, much against the general feeling that many other mainstream exhibitors were reporting. The second was in the news with the proposed links between the Association of Mortgage Intermediaries (AMI) and the Corporation of Finance Brokers (CFB) showing that the gulf that grew between practitioners of first and second charge lending might now be bridged.
Secured loans are here to stay and the market for them is expanding rapidly. Intermediaries wishing to improve their portfolio of services and get involved in offering advice will only increase the market penetration and acceptance of secured loans as a mainstream product.
Andy Moody is Managing Director of Loanoptions.co.uk