Since talk of EU legislation first began, many years ago, the impact it would have has been discussed exhaustively. Commentators from across the industry and beyond have shared their opinions. We’ve analysed what it will mean for fees, for brokers, for second charge brokers, for lenders, for packagers and for networks. We’ve looked at how technology will need to respond, how criteria will change and how marketing may be impacted. The one thing we sometimes forget to talk about is, ironically, the whole reason for the regulation in the first place – the consumer.
We know that the Mortgage Credit Directive will protect consumers. We know providing a seven day ‘reflection period’ is a safe option, ensuring binding financial contracts are not entered into without due care and consideration.
We know instructing lenders to ensure the loan is affordable before entering into any agreement is common sense and will benefit the consumer. Placing the responsibility of checking affordability at the door of the lender will mean lenders are much more cautious in who they lend to and, after witnessing how dangerous offering credit to the wrong people can be, this has to be welcomed.
We know ultimately more consumers will receive the right loans and that can only be a good thing, for the market, for those of us operating in it and of course for borrowers.
These consequences have been discussed, particularly in the material distributed by the regulator.
However, these are the eventual impacts. The outcomes. What we don’t discuss is the impact the change of processes will have on the consumer and their attitude towards second charges. When we do, we find that while the outcome will be more consumer friendly, the process itself will not be.
Let’s look first at the costs involved. The cost of giving advice is going to increase a firm’s costs significantly, not least because they’ll have to allow for liability of getting things wrong. These costs will undoubtedly be passed onto the consumer.
And of course, the industry is still somewhat undecided on how the fee structure will change going forward. It’s possible we will move towards a flat rate model. In the past, of course, second charge fees have always been calculated as a percentage of the loan. Should we move towards a flat rate the problem arises of where that rate should be set. As we all know there are costs involved in arranging a secured loan – it is a much more complex process than that used when arranging a first charge – and there’s a certain level that has to be achieved in order for a business to stay profitable. As such customers who are borrowing less may find themselves paying disproportionately high fees for the amount they borrow.
Then, of course, there is the time element. Having to undertake a fact find when you were expecting to be able to borrow the money you need quickly and easily may be something of a turn-off for consumers. Nobody wants a cumbersome, clunky process, particularly if they’re not looking to borrow an awful lot.
Customers for small ticket loans may be driven into unsecured territory. Unsecured loans may have higher rates but you would be surprised what people will be willing to pay to avoid hassle. Indeed, the rise of comparison sites in financial services is largely down to the fact consumers don’t have the time – or the inclination – to go through complicated, time-consuming sales processes. Why arrange a meeting with an adviser and go through your entire financial history when you can sort yourself out with a few clicks of the mouse? (I’m speaking purely as devil’s advocate of course).
I’ve no doubt the regulators are doing right by consumers by implementing EU legislation and full regulation of the second charge sector and it is in all of our best interests to have a safe, consumer friendly market. However, I do think the impact on consumers’ attitudes to secured loans will be affected, as will the availability due to very cautious affordability calculators. As a result we may see some deterred from the sector, opting instead for a more efficient and easier option. The regulators may welcome this in principle but most second charge customers don’t meet prime unsecured borrowing criteria so could end up paying significantly more or running in to the arms of unsecured sub prime lenders and getting in to deeper problems.
MCD regulation is now in play across the second charge market and, this month, the rest of the market will follow suit. We’ve seen the impact on our technology, our roles and our day to day work. Now it’s time to see what the impact will be on the people this entire exercise has been for, the consumers. Watch this space.
2 out of 3 borrowers get a lower rate than our representative example of a regulated secured loan below:
Mortgages and Remortgages
£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
£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.
£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.
THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME
REPAYING YOUR DEBTS OVER A LONGER PERIOD CAN REDUCE YOUR PAYMENTS BUT COULD INCREASE THE TOTAL INTEREST YOU PAY. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY OTHER DEBT SECURED ON IT.
If you have been introduced to Promise Money by a third party / affiliate, Promise may pay them a share of any fees or commission it earns. Written terms available on request. Loans are subject to affordability status and available to UK residents aged 18 or over. Promise Money is a trading style of Promise Solutions Ltd. Promise Solutions is a broker offering products which represent the whole of the specialist second mortgage market and is authorised and regulated by the Financial Conduct Authority – Number 681423.
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