It’s not surprising that some brokers steer clear of second charge loans when there is so much conflicting information being touted around the industry so here are some key facts as I see them.
Fees – Let’s grab the prickliest thorn first.
Some people suggest extortionate fees are charged industry wide. Well there are firms working on the edge of both the first and second charge industry and if customers are routinely being charged a 10% fee on a £50,000 loan then there is something wrong. However such firms are in the minority so don’t believe the hype. Just avoid them. Most firms offer much lower fee options from minimal upfront fees where you are giving the advice to higher but reasonable fees paid on completion of the loan. The fees will be higher than typical mortgage fees as the underwriting (if done properly) is ultimately manual and more challenging and in most cases the master broker is obtaining and paying for first mortgage references, consent and often a valuation out of his own pocket. This is an alien concept in the first charge sector but when customers are offered the chance to pay such fees up front, most still opt to add them to the loan. That said, if you are happy to give the advice and your clients are happy to pay fees upfront, a packaging option with lower application fees may suit you.
Packager, referral or direct?
Many think the decision is around the financials attached and whether you deal direct with lenders and do more work, use a packager to outsource the underwriting and processing or refer to a specialist and do virtually nothing. However there is far more to it. We know that manual underwriting will usually trump any sourcing system and experienced underwriters will know how to avoid problems later in the process and more importantly where lenders will stretch criteria to offer far better terms. Only last week we had an example where manual underwriting reduced the total amount repayable of £81,000 (offered by another broker) to £34000. No mortgage sourcing system will tell a less experienced broker when he is heading up a cul-de-sac or replace the underwriters experience in negotiating better outcomes. Going direct leaves you more exposed so many mortgage brokers prefer to give the advice and use a packager to reduce their workload and achieve good customer outcomes. If in doubt about the robustness of your sales process the referral option is easy and low risk.
Seconds are for problem cases only? – Wrong.
Most of the secured loan business generated by mortgage brokers is actually at the prime end of the market and second charge lenders can still offer prime rates to borrowers who would arguably be considered non-conforming in the first charge sector. Seconds will compete toe to toe with firsts, sometimes on rate, regularly on overall suitability. Make the comparison and then decide.
Flexibility – You can place business which simply wouldn’t fit for a first charge.
Affordability is a big opportunity as loans are assessed on income and expenditure and don’t suffer from the same LTI caps imposed on first mortgages. It’s clear that single person will have a different affordability profile to a married couple with three children. Most seconds lenders recognise this, apply interest rate stress tests, and make lending decisions based on affordability rather than automatically turn a case down which is plainly affordable. How would that be TCF?
Second charge lenders are generally hungry, smaller, faster and getting to a decision maker is easier. Issues are more easily overcome and there is greater willingness on both sides to find a solution which makes sense. A different approach to affordability, types of income, property construction, CCJs, arrears and credit profile all lead to a deserved reputation for flexibility and a can do attitude.
Offer seconds and complete more mortgages
If you are not comfortable with seconds then your clients won’t hear about them from you and when the time comes don’t be surprised if they elsewhere. Far better you educate them so they contact you and then decide if a remortgage or loan is suitable – Remember a loan today is a potential remortgage in a few years.
How to start offering seconds.
It’s simple to start with a referral process to understand how seconds work and get up-skilled by talking to underwriters. Getting comparison quotes is easy and it’s then a small step to start giving advice using your existing mortgage sales process whilst relying on Promise to find the best products and package your loans. Dealing direct with lenders is an ultimate option but consider more hassle, more abortive work and potentially poorer outcomes.
Ditch any outdated opinions. A second charge is sometimes the best solution for you and your client – however you choose to deal with them.
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.
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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