If you want to start a heated debate among mortgage intermediaries, then suggest that secured loans are often far better than remortgages for people wanting to raise extra capital. Indeed, there are those who regard secured loans as the very devil’s work – they wouldn’t touch them with the proverbial pole and believe there is no place for them in a perfect mortgage world. In reality, there is no simple answer to which is best and each case needs to be considered fully on its merits. However, where a borrower has some adverse credit history, then the secured loan option is often the best solution. The problem with remortgaging is that the whole of a borrower’s mortgage is on the same terms. This is fine if you can obtain excellent remortgage terms, but if the borrower has had recent adverse credit, remortgaging may be penal. It could be far better to arrange separate finance on the ‘broken credit’, assuming the first mortgage is still more or less in order, and leave the main mortgage alone.
Resistance
So why don’t brokers offer secured loans if they are meant to give best advice? There has been a resistance among intermediaries, some of whom only have mortgages on their shelf and so will always look to those products for an answer. They will deliver the best of what they’ve got, but it may not always be the best deal for the client.
But are things changing? The answer seems to be a resounding ‘yes’, and the level of intermediary interest in secured loans or second charges has accelerated because they can see that the ‘one-size’ solution is no longer appropriate. But intermediaries who want to add seconds to their armoury need to recognise they have to adjust the process to meet the requirements of a different market. Not everyone will have the time to familiarise themselves with the different methodology, but there are many master packagers, who have the expertise to handle the whole transaction for an intermediary, leaving him free to handle his mortgage clients, in the knowledge that his client will be receiving the best attention possible.
At Swift, we think that the recently announced link between the Association of Mortgage Intermediaries (AMI) and the Corporation of Finance Brokers (CFB) will make a big difference to both the perception of the secured loan market among mortgage brokers and the way in which it will help to focus intermediaries on the wider market opportunities which secured loans can provide. It is a very positive step. Swift is an associate member of both AMI and CFB. We have a long-standing positive relationship with the CFB and we look forward to seeing the fruits of their work together to integrate the two market sectors with each other.
Non-conforming parallels
If you are like me, you will probably be feeling a sense of déjà vu when this topic gets extended airplay. Of course, we have been here before. In fact, about 10 years ago there was similar debate over the serious arrival of non-conforming mortgages. I can remember when there were dire prophecies about the end of Western civilisation if this type of mortgage was allowed to get a hold. Yet 10 years on, non-conforming mortgages are a staple part of every mortgage broker’s portfolio with an ever increasing number of lenders involved, including some who were particularly dubious about the whole issue in the beginning.
While non-conforming mortgages were viewed by many as a new phenomenon when they ‘arrived’ back in the mid 1990s, in fact there had been several specialist mortgage lenders operating in this undeveloped niche for some time although they had kept their heads below the parapet and carried on their business broadly unnoticed.
If a parallel with non-conforming mortgages can be drawn, then will we see secured loans, including the non-conforming variety, become a fully integrated part of the mortgage market? Personally, I don’t see why not. With the changes to the Consumer Credit Act (CCA) and with more mortgage lenders entering the secured loan market, intermediaries and packagers will be encouraged to commit to secured loan or second charge business and once intermediaries are comfortable with the application process and the benefit of swifter funds release, the happier they will be delivering it as a solution for their clients.
Hurdles
There are one or two hurdles that need to be surmounted. One area that could impact upon the borrower, the intermediary and the lender, concerns the granting of permission to register the second charge by the first charge lender. Most first charge lenders co-operate fully, but one or two seem to go out of their way to hinder the process and are reluctant to actually grant the consent even after having agreed to provide it. I can understand if there are fears that customers are over-committing themselves, but many consolidation type arrangements have the effect of reducing the customers’ total outgoings. I know that if I were a broker and I knew the first charge lender was slowing everything up, I’d remove that lender from my panel and I’d tell all my business contacts about it. Most annoyingly, these borrowers are often in a very difficult position and need their finance as quickly as possible. Unnecessary delays are a real inconvenience.
For the secured loan proposition to work, applications need to be packaged fully and accurately. In this way, funds can be issued to the borrower on the same day that an application is received. That’s one benefit that makes the secured loan solution so attractive, especially, as mentioned before, where the borrower needs help quickly. Here at Swift, we work hard with our accredited intermediaries to ensure they know exactly what they need to do to maintain high standards. New entrants into the market will almost certainly come from a first charge mortgage background, where often the emphasis on rapid turnaround is often missing and there will be a significant focus on training and control to ensure high service standards are maintained.
Whether intermediaries as a whole are prepared to look at this market without existing prejudices clouding their judgement is going to be a matter of personal choice. A lot depends on past experience and I do have some sympathy with those practitioners who remember some of the mis-selling stories involving second charge lending from the past. In the light of day, the sins of the past should not get in the way of intermediaries looking again at this market with fresh eyes.
Looking forward
So much has changed, particularly in relation to the problems surrounding the calculation of redemption of a loan before its expiry date, summed up by the bureaucratic nightmare that was the Rule of 78. The May 2005 amendments to the CCA, which included the abolition of the Rule of 78 as a method of calculating early settlement charges for loans of up to £25,000, has continued the momentum in terms of credibility. In addition to this, the Department of Trade and Industry (DTI) has set out a timetable, beginning in June this year, of further amendments to the original CCA. One amendment with particular significance is the proposed removal of the £25,000 threshold in April 2008. Currently, all CCA regulated loans carry no more than two months interest, which more than bears comparison with the mortgage market. In fact, with the recent moves by some mortgage lenders in increasing early redemption penalties to stop customers in search of better deals moving their mortgage loans to other lenders, there looks to be a growing anomaly which mortgage intermediaries will have to address.
Looking forward, no one can argue that this country is not facing a huge personal debt mountain. While we can chew over old differences as much as we want, there is a real need to find the right solution, taking into account the needs of customers who are faced with a growing personal debt problem and the deterioration of individual credit ratings. Remortgaging is a viable option for many people but there is no doubt that the need for innovative finance packages has never been greater and any mortgage intermediary worth their salt is going to be examining all the options that are available to them.
