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How to solve a problem like second charge fees?

How to solve a problem like second charge fees?

There’s been plenty of debate of late surrounding fees in the second charge market. And rightly so. If we want the sector to reach its full potential with consumers then it needs to be fair and that means ensuring fees are not unnecessarily high. But I do believe in all of the debate we’re missing the point. In order for fees to really be fair they need to be transparent and the lack of understanding that still exists in the market means that the picture can still be rather foggy.

Historically the practice has been for master brokers to bundle all the anticipated costs in to one fee and then share that fee with the introducer, often after the costs were deducted. Because the costs, including the valuation, were born speculatively by the master broker the overall fees reflected the risk.

Since MCD the fees can be unbundled and clients can pay the valuation costs, or the fees of their introducing broker separately in which case the risk on abortive costs disappear which should allow fees to reduce. However the reality is that most borrowers still opt to add the valuation costs and the chances of a broker recovering these are slim if the case undervalues or the borrowers change their mind. Even in a pure packaging scenario the risk remains unless clients are forced to pay the valuation upfront. I have yet to see many mortgage brokers who advise on, or introduce second charges, volunteering to pay the valuation fees for their clients yet there seems to be an expectation that master brokers should.

So today we see many different models with some brokers hanging on to the old fee structure, some offering an unbundled and more flexible approach and others adopting a packaging approach which forces more of the upfront costs, and risk, on to borrowers but offers lower completion fees.

There is little doubt that fees have reduced within most firms and in addition we explain to every client in writing all of the fees and how they are shared between master broker, introducer and any third party. I expect other firms do the same. However I have seen evidence this week of a master broker charging a 10% fee of £4500 even though the borrowers were paying for the valuation upfront. Little wonder fees are in the spotlight.

But let’s not lose sight of the impact of the valuation on the total cost of borrowing and advice process.

Let’s take a look at an example. Say we have two borrowers applying for £20,000 – all circumstances and LTV’s the same apart from the property valuation.

Borrower A has a property valued at £200,000 and the approximate valuation cost is £200.
Borrower B has a property valued at £2million his valuation will cost £2,000.

The two borrowers could pay different amounts to take out what seems to be the same loan. Add to the valuation cost the reasonable fees of a master broker and any referring introducer and immediately the total fees exceed 10% of the loan amount. Over 10% is deemed to be high but the master broker cannot control the valuation costs or that of the introducing broker .

Where third party fees (mainly valuations) are disproportionately high to the loan amount the advising firm must have a duty, and the responsibility, to decide if the third party costs render the proposed loan unsuitable.

Some lenders have introduced caps on fees which include the third party valuation fees. Whilst this seems to be treating customers fairly it can, in fact, do the opposite by overriding the adviser’s ability to decide on what is suitable taking into consideration the borrower’s needs and circumstances – especially on loans below £25000. If an adviser deems the loan is still suitable they are left with the dilemma of approaching a lender which may be more expensive but doesn’t enforce a cap on third party fees. Clearly TCF, in this instance, is not working in the client’s interests.

A quick sense check for a moment.
Would you pay a £220 valuation fee on behalf of your client if you stood to earn £1000 subject to the loan completing? Probably yes.
Would you pay a £2000 valuation fee on behalf of your client if you stood to earn £1000 subject to the loan completing? Probably no unless you have a cast iron guarantee the client would reimburse you.

In time fees will find their level – especially when the FCA starts getting fee data from lenders which highlights those charging disproportionately high fees. In the meantime the key is transparency to the consumer at the outset and throughout the process.

The total costs on each second charge transaction will vary because that is the nature of the beast. The choice of lender, existing first mortgage and property valuation with throw in huge variety. So let’s be clear on which fees we are talking about. Master brokers and introducing brokers fees need to be fair, consistent and properly communicated to borrowers but so do any third party costs. In most cases I expect they are but let’s not lose sight of these third party costs and who is paying / taking the risk on them. It’s not all about the headline – clients and introducing brokers need to be told these too.

www.promisemoney.co.uk

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2 out of 3 borrowers get a lower rate than our representative example of a regulated secured loan below:

Mortgages and Remortgages

Representative example

£80,000 over 240 months at an APRC OF 4.3% and a discounted variable annual interest rate for two years of 2.12% at £408.99 per month followed by 36 payments of £475.59 and 180 payments of £509.44. The total charge for credit is £39,873 which includes a £995 broker / processing fee and £125 application fee. Total repayable £119,873.

Secured / Second Charge Loans

Representative example

£63,000 over 228 months at an APRC OF 6.1% and an annual interest rate of 5.39% (Fixed for five years – variable thereafter) would be £463.09 per month, total charge for credit is £42,584.52 which includes a £2,690 broker / processing fee. Total repayable £105,584.52.

Unsecured Loans

Representative example

£4,000 over 36 months at an APR OF 49.9% (fixed) and an annual interest rate of 49.9% would be £216.21, total charge for credit is £3,783.56. Total repayable £7,783.56.


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