The second charge market as we know it has changed forever. Yes, 721 days after the Financial Conduct Authority took over responsibility for the consumer credit industry, with the onset of the Mortgage Credit Directive, second charge loans are now fully regulated. Welcome to the other side.
While MCD officially came into effect on 21 March the seconds industry actually switched over to the new rules on 15 February in order to ensure pipeline cases were completed before the official deadline (although not all lenders were ready on time).
But what does this new regulatory landscape look like for the second charge market and what does it mean for advisers and lenders?
Non-advised to advised
The key difference for the seconds industry is that all sales of secured loans must now be advised. This is quite a monumental change for some firms. Indeed, there are many companies in operation who have only ever offered seconds via a non-advised process. Making the move to an advised model has been quite the challenge for them.
Non-advised sales traditionally followed a more tick-box led approach. It was about finding out customer preferences and delivering on them so the broker would ask questions to find out what type of product the customer wanted and what type of term they were looking for.
Advised sales take a different position. Put simply, it’s about delivering what the client needs not what the client wants. Brokers must fully assess the client’s affordability and financial circumstances in order to make a suitable recommendation. This may sound blindingly obvious but many mortgage brokers have sold seconds on a non advised basis and will now need to mirror the process they use for first mortgages if they wish to retain control and responsibility for the sale..
As part of the new sales process lenders will issue a European Standardised Information Sheet (ESIS) instead of a credit agreement and a binding offer valid for 30 days.
Crucially, no fees can be added to the loan automatically and borrowers can choose when to pay which fees. For example, a customer may choose to pay the valuation fee upfront. It’s another massive change from the old CCA regulations.
While consumers may like the flexibility of choosing when to pay which fees, there are some downsides to MCD regulation from the client’s perspective.
The sales process will take longer as a result of the necessary checks being carried out – particularly affordability. Fact-finds could take over an hour. For borrowers who are looking for quick and easy finance the extra time it will take to access a secured loan may make the product decidedly unattractive. Indeed, we may well see many borrowers opting for the unsecured route instead, particularly those seeking to borrow a small amount.
Costs will rise. The cost of giving advice will mean significant cost increases for a firm and, as is always the case, these hikes will be passed on to the consumer. On the plus side, the two periods of 8 day consideration which slowed down the processing periods for 40 years have gone. If a deal changes due to valuation, income or credit, a new offer can be issued and accepted straight away. I expect this will please virtually every borrower.
Ultimately of course the changes mean more customers will receive the right loan and that can only be a good thing for the market. With lenders responsible for checking affordability they are likely to be much more cautious when deciding who to lend to and this should avoid the problems that can occur when credit ends up in the wrong hands.
Since talk of the consumer credit industry being brought into the FCA’s remit began, the regulator has implored mortgage brokers to view seconds in the same way as they do first charge mortgages and, as such, secured loans must be considered when looking at possible solutions for a client’s needs, even if the broker doesn’t advise on or refer secured loans him / herself.
For those brokers who choose to do more than simply mention the possibility of a second charge, assuming a second charge may be suitable for the client, the broker has two options. Either refer the case to a master broker – a practice many brokers have always operated – or he can advise on the sale himself while employing the use of a specialist packager.
While both options are perfectly acceptable, under the new regulation the way in which brokers offer seconds will impact how they can market themselves. The crux of it is this – if a broker want to maintain his independent, whole-of-market status he must advise on both first and seconds.
Many brokers value their independent status highly and will want to retain it. It is likely then we will see more brokers looking to take the packager route and, as a result, we will see the rise of the specialist packager in the market. I’ve no doubt we’ll see an influx of new firms enter the space while those firms who have traditionally not offered a packaging facility may well do so.
The advice to brokers right now is to align yourself with a loans specialist which offers both referral and packaging options and has a proven track record of both. Packagers who have yet to operate in the seconds market will still be finding their feet and master brokers who have never offered a packaging option in the past will need some time to get to grips with a different process to that which they’re used to. There are more disparities between the two than one might think.
These are interesting times and, while the dust will settle soon once the new regulation has bedded in, the market will look very different going forward.
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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