As we all know, the advent of ‘Mortgage Day’ brought about an interesting distinction between mortgagees and secured loans. The former falls under Financial Services Authority (FSA) regulation, while the latter remains unregulated. What this will mean in practice is open to speculation, but the general consensus is that many homeowners will take the secured loan route, due to simpler application procedures.
For a broker to be confident of giving best advice though, there are a number of factors that should be taken into consideration. First up, because of the simple fact that some clients’ applications may well be marginal cases, the incidence of secured loans will inevitably increase following regulation.
In fact, ease of application approval is not the only reason that many brokers now offer their clients the alternative choice of a secured personal loan. In addition to this basic point, borrowers may well discover that set up costs for some remortgages are more costly than with personal loans. Although many remortgage products currently offer free legals – a factor that is unlikely to change in the near future – some remortgage transactions still need local searches and other peripheral costs, not to mention potentially expensive valuations.
For this reason alone, there is now a huge incentive for some borrowers – not to mention brokers – to drive forward the secured loans market, as the up-front cost saving on this type of loan could be considerable. This factor is even more of a consideration when it comes to smaller loans, where the initial cost of borrowing can soon become prohibitive, in proportion to the actual amount being borrowed.
Certainly, for borrowers wishing to refinance for a larger amount, it would be prudent to consider a remortgage, where possible. After all, the overall rates available will inevitably be lower than for a secured loan. In fact, depending on the product chosen, they may well be under 5 per cent for an initial incentive period. That is a figure that no secured loan could realistically match.
Monitoring finances
The other point is that brokers should be advising homeowners of the need to regularly monitor and assess their mortgage finances. As such, capital raising or debt consolidation can be looked at in conjunction with migrating to a lower rate or more favourable product for their main mortgage. If the two events are combined, this eliminates the need for at least some householders to consider the secured loan alternative.
Of course, the counter argument to this is that, for the typical value of the average secured loan, it is often not worth the hassle of remortgaging in full, especially if there are penalties to pay to the existing lender. A simple secured loan application could see the customer getting exactly what they want, in terms of funds to consolidate existing debt or for whatever purpose, allied to a rate that is far more attractive than a typical unsecured loan.
In this respect, brokers need to be careful to direct their clients towards the most suitable loans for their needs. If, for example, the client only needs to raise £10,000, is it really appropriate to advise him or her to remortgage? In some circumstances, the answer will be ‘yes’, but in others, an emphatic ‘no’.
The urgency with which the client needs to obtain the finance is also an issue that should be addressed. In general, it is true to state that a secured loan can be processed more quickly than a conventional remortgage transaction. In a remortgage, solicitors need to be instructed, a valuation undertaken, the title deeds obtained and searches undertaken. This all takes time, as does the drawdown of funds from the lender. With a secured loan, the whole transaction can be finalised in a matter of days.
In fact, the only caveat to obtaining secured funding immediately is the need for the first chargeholder – the main mortgage lender – to supply its consent to the addition of a second charge on the title to the property. Having said that, it is very unlikely that a high-street lender would refuse such consent.
Further advance
Of course, Halifax has now highlighted another avenue for homeowners seeking to raise funds, although it’s fair to say that savvy borrowers always recognised this route as a possibility. Step forward – not for the first time – the further advance.
Traditionally, brokers have tended to shy away from recommending that their clients consider a further advance with an existing lender, on the basis that, firstly, this might not be best advice and, secondly, no commission is paid on the deal. Halifax’s move changes this latter commercial objection, as it is now paying commission on intermediary-arranged further advances.
Naturally, brokers must still ensure that their recommendation to remain with the same lender follows the principle of best advice. In this regard, however, it’s not just the rate that’s all important. Other factors, including speed of drawdown and ease of application are very significant, and can legitimately tip the balance in favour of an existing lender.
One factor that remains relevant is the fact that, if a homeowner already has a 95 per cent advance, it is unlikely that he will be able to remortgage to gain any significant funds. This can be a major consideration, especially where the borrower needs to refinance in order to consolidate debt. Many secured loan providers are happy to permit borrowing up to 130 per cent of the property’s value, as the interest charged spreads the slightly higher risk this potentially poses.
Brokers must advise their clients carefully. Never has the phrase ‘horses for courses’ been more apt than when advising on secured lending versus remortgaging.
