The secured loans sector has undergone a massive transformation over the past few years. Once viewed as a ‘rotten apple’ within the mortgage industry, more and more brokers are now realising the benefits of having a secured loans proposition as part of their business model. The market is starting to blossom and ripen as part of the wider mortgage market.
Previously a sector with very little attention or interest, an increase in consumer debt and borrowing, coupled with a rise in product diversity and complexity, has led to an overhaul of the whole mortgage market, resulting in an increase in borrowers opting for non-conforming mortgages or taking out secured loans. Indeed, in its research of the secured loans sector, Datamonitor predicted that by 2009 it would be worth £50 billion, and recent enhancements to the market, and to providers’ product and service propositions have helped pave the way for increased interest and business.
Bob Sturges, director of communications at Money Partners, admitted that secured lending had undergone a rapid transformation, and the industry was now beginning to get to grips with the opportunities available in the blossoming market. He said: “There is a growing awareness that secured loans offer a viable alternative to other forms of secured borrowing, such as remortgaging or further advances. Secured loans are particularly likely to appeal to borrowers keen to avoid early redemption charges and other fees as a result of remortgaging, or, who by doing so, would lose the benefit of favourable fixed or discounted rates. With more than half of all current mortgages now on such terms, this represents a sizeable market.”
Rod Murdison, proprietor of Murdison & Browning, admitted there was a market for secured lending, but cast some doubts over the practice. He said: “There are two or three areas which aren’t formally regulated, like secured loans and commercial, that are being pushed forward as great opportunities. But the only time I can see a secured loan being used is if the existing deal a customer is in had high redemption penalties. There is a market for it.”
AFB
While the increased understanding of secured loans in the industry has helped repair its once fragile façade, the launch of the Association of Finance Brokers (AFB) has been the main driver in increasing confidence in the sector, serving as a boost to those active in the market. Having a trade body dealing exclusively within the sector should also go some way to allay intermediary fears over secured loans, in addition to enticing a greater number of advisers who may have previously steered clear of the once volatile sector.
Although some intermediaries have not been shy in stating their scepticism of the sector and questioned the legitimacy of it, the launch of a trade body devoted to those completing secured loand business has helped quell concerns. Although still very much in its infancy, the AFB has undoubtedly helped raise the level of professionalism in the secured loans market simply by its presence and its future role should help move the industry forward.
However, Murdison argued that to some, the sector still evoked the possibility of potential scandal. He said: “The problem with secured loans is the potential scandal. Is it better to tell a customer something that will earn you money or better to advise them to do a balance transfer that earns you nothing? It’s very difficult. But I would be nervous about the Financial Services Authority (FSA) looking into it, as I don’t think circumstances are ever improved by the FSA getting involved.”
Lender changes
Lender enhancements to the market have helped to introduce brokers to the opportunities available. The introduction of sourcing systems, and enhancements to lender websites have also contributed to the increase in secured loans interest. With a greater need for consumer and intermediary understanding in the sector, sourcing systems and online toolkits should go some way to improve confidence and educate those keen to expand their business propositions.
Sturges argued that technological advances would continue to push the market forward, but urged the industry to remain committed to organisational links. He said: “As the sector becomes more sophisticated, there will be greater use of the technological innovations – including sourcing system capabilities, affordability calculators and automated valuation models – that now add real value in the mortgage sector. But it isn’t just about technology. Brokers entering the secured loans world for the first time have much to gain by forming partnerships with established broker-packagers, or master brokers. Many of these have a deep understanding of the processes and can provide hands-on support.”
Consumer drivers
By far the main driver of the secured loans market has been rising consumer debt; a factor that shows no signs of abating. Research by Alliance & Leicester indicated that consumer debt had continued to rise, albeit at its slowest rate. While this trend continues, secured loans will have a valid role to play in the wider market, and consumers will have cause to use such options.
As Sturges argues: “The secured loan option appeals to customers who have acquired a recent adverse credit record and are so excluded from remortgaging or obtaining a further finance from a mainstream lender. With personal insolvencies and other debt problems on the rise, this offers
another significant opportunity for secured loan providers.”
Bridging finance
Bridging
Bridging loans have also emerged as a viable option for borrowers looking for a short-term financial solution. Enabling borrowers to obtain a set amount of money to secure a property, or make enhancements to their current property, while waiting for a loan from their mortgage lender or other source, bridging is increasing in popularity among brokers, and, as a result, borrowers. Once viewed as a niche area, bridging is now a lot more commonplace in the market, and with an increasing number of people opting to improve their properties rather than move, as a result of spiralling house prices, bridging finance provides an alternative to remortgaging.
The growth and strength of the secured loans market can be put down largely to the interest among non-conforming clients. Secured loans provide a useful consolidation tool, while also providing a viable alternative to remortgaging, or searching out an unsecured loan. Available to most borrowers and financial situations, secured loans provide a solution for those looking to consolidate or refinance more expensive unsecured debt, or those who want to release equity from their property.
A viable alternative
The loans market has grown rapidly over the recent years as borrowers have struggled with affordability and failed to catch up with the ‘spend now, save later’ attitude inherent in society since the 1990’s. With rising debt levels more people are realising the need for a form of debt consolidation or an alternative to remortgaging to free up capital.
Although the secured loans market still retains the stigma of a ‘shady market’ this is eroding and the formation of the AFB, in conjunction with improved business practices from lenders and brokers should go a long way in helping the sector move forward.
More advisers are realising the opportunities and helping borrowers to understand the benefit of a secured loan, as opposed to unsecured borrowing or a remortgage. The flexibility of secured borrowing, with terms from an average of three years, up to 25 years, means the possibilities in this market are wide ranging, and appeal to a cross section of potential borrowers.
As Sturges concludes: “Secured loans have a positive future. While they are not suitable in every case, they offer a real alternative to other forms of borrowing. As the sector matures, firms that take a responsible, realistic and long-term view have much to gain by adding this option to their portfolios.”
