The secured loans market has certainly become a hot topic in the intermediary press recently. The reasons for this upsurge in media interest appear to be twofold: firstly regulation (when will secured loans be regulated in the same way as mortgages?) and secondly PPI insurance (will the FSA ban single premium payment protection policies?).
Although both of these are somewhat negative factors, I’m pleased to say that I have also read news stories in which brokers have been reporting an increase in sales volumes of secured loans. Good news indeed. Undoubtedly this is partly due to the significant increase in consumer borrowing which took place in 2005. In the UK the level of consumer debt is now bigger than the size of the economy, with total debts outstripping gross domestic product for the first time.
In 2005 the combined amount owed by families rose by 10.2 per cent to £1,158 billion (compared to economic output, which was £1,127 billion). Consumers are confident to borrow as these figures clearly show and that increased borrowing has filtered through to the secured loans market, as well as the mortgage and unsecured loans markets.
However, I also think that intermediaries are starting to understand how secured loans fit into their product portfolio. 18 months ago I read an article in which one mortgage industry guru said: ‘There is not a single instance when a secured loan is a better option than a mortgage.’ This is blatantly untrue and it’s pleasing to see signs that brokers do understand when a secured loan may be more appropriate than a mortgage.
Take, for example, a borrower who wants to raise an additional £9,000 and who already has a mortgage with a competitive rate of interest, with a traditional high-street lender. If, during the term of their mortgage they have experienced financial difficulties and have a history of arrears, they may find it difficult remortgaging with another mainstream lender at a comparable rate of interest. Their only option may be a non-conforming mortgage with a higher overall rate of interest. In these circumstances they may be better advised to hold on to their existing low rate mortgage and apply for a secured personal loan to raise the additional capital.
There are also a number of other circumstances when a secured loan may be a better deal than remortgaging:
- When a borrower has a mortgage with a competitive fixed or discounted interest rate, with early redemption penalties to pay for early settlement.
- When a borrower wants to apply for a loan over a short period of time. With a remortgage they will incur up front fees (valuation fees, application fees, legal fees, lenders references and possibly higher lending charges) and the loan will be repaid over the term of their mortgage – typically up to 25 years. This can make the total amount of interest payable quite high. Secured loans usually have no up front fees and the loan can be taken for a shorter period than the main mortgage. This can make it a cost effective way to raise short-term capital.
- When a borrower wants to raise additional capital quickly. Secured personal loans can usually be completed more quickly than mortgages, because once an application has been submitted to a lender, the loan can potentially be paid out in 48 hours. With a mortgage it takes longer due to the offer of advance and completions process.
- When a borrower wants to clear existing debts quickly. With interest rates on secured loans starting from 7.7 per cent, it makes sense for borrowers to consolidate existing more expensive debts (e.g. credit card and unsecured loans) into a single cheaper loan. Secured loans usually have no up-front fees and can be repaid over shorter periods, making them ideal for this purpose.
One of the key issues in terms of establishing parity between secured loans and other forms of credit, is regulation. At the moment, the secured loans market does not operate on a level playing field with the mortgage market, because of the different regulations which apply.
For example, the sale of mortgages is controlled by the Financial Services Act, but the sale of secured loans under £25,000 falls under the Consumer Credit Act and loans over £25,000 are not regulated at all. Brokers who deal with secured loans also currently find themselves in a bizarre situation where the main loan product is unregulated but the sale of any associated insurances (e.g. payment protection insurance) is regulated. These types of anomalies need to be ironed out as quickly as possible.
Today, developing advertising campaigns which cut across the mortgages/secured loans divide is difficult. Any such adverts need to comply with the stringent FSA advertising regulations, which immediately puts any secured loans proposition at a disadvantage to an advert created under the CCA regulations. In reality, this type of advertising is unlikely to become commonplace until there is greater harmonisation of regulation between the two sectors.
The sale of single premium payment protection insurance is another key issue. Hardly a week goes by without a sensational story being printed in one the intermediary publications and the campaign calling for single premium PPI to be banned is gathering a head of steam.
There is a need, however, to sort fact from fiction. At the moment the press are peddling the myth that the FSA has laid down a deadline of 17 March for the PPI industry to put its house in order, or the FSA will move in and sort matters out itself. The truth is that 17 March is the cut-off date for responses and proposals following a meeting held in December between the FSA and the CML, AMI & ABI, at which issues relating to PPI were discussed. The FSA is not threatening to ban PPI as the media suggests; it does, however, want constructive feedback which will help to resolve the issues.
Given the level of debt referred to earlier in this article, the possibility of the uptake of payment protection insurance falling has to be a concern. Research published in February 2006 by Mintel confirmed that 2.5 million (13 per cent) adults have total debts in excess of £10,000 (not including mortgages). The research also confirms that 70 per cent of these adults are not concerned about their level of debt and one in four may even consider borrowing more. Paul Davies, senior finance analyst at Mintel, said: “The high levels of debt and lack of worry does clearly represent a cause for concern. Although the research certainly shows that an impending debt crisis is not inevitable, a large minority of households are extremely vulnerable to any deterioration in the prevailing economic conditions.”
There is a danger therefore that a knee-jerk reaction to the perceived issue of single premium PPI sales, may end up compounding the problems faced by consumers with debt issues, rather than helping to resolve them. It’s called the law of unintended consequences.
My view is that the industry needs to face up to the issues and develop a workable solution itself, rather than waiting for a solution to be imposed upon it. I’ve recently been involved in discussions with loan companies, regulators and trade bodies and I can confirm there is a collective understanding about the issues which need to be addressed.
The secured loans industry is not without its faults. However, secured loans do have a valid role to play and are an important part of the UK credit industry and will be for a long time to come.
Tony Machin is group managing director at Freedom Finance
