Until recently, second charge or secured lending has not enjoyed a very good reputation in the UK financial services marketplace, despite being an increasingly popular source of borrowing among consumers. This poor perception is largely based on the image of aggressively marketed loans, usually via tabloid papers and daytime television, targeting customers who are looking to consolidate their debts.
Traditional thinking among mortgage brokers in particular is that if a homeowner does need to consolidate other loans or raise extra cash, they would be better off remortgaging and rolling all their debt it a more cost-effective home loan. But that is not necessarily always the best solution, and now that the image of second charge loans is changing, introducers are waking up to the potential of the product for their clients.
A shot in the arm
The second charge lending sector was given a shot in the arm earlier in the year with the launch of the Association of Finance Brokers (AFB). Not only does the AFB share its roots and therefore its pedigree with the Association of Mortgage Intermediaries (AMI), it also is backed by some leading and highly reputable players in the second charge market, marking a fresh start for the industry.
It’s important to remember that the AFB was an industry initiative, set up by brokers and providers who realised that a united front is needed to boost the sector’s image and prepare for further regulation. There is still debate as to whether second charges will eventually be regulated by the Financial Services Authority (FSA), but currently the sector is overseen by the Office of Fair Trading (OFT) and regulated under the Consumer Credit Act.
However, legislative reviews are underway by both the OFT and the EU, including an investigation of the controversial single premium payment insurance, so the activities of the AFB will certainly help to make any future changes workable for the industry and beneficial for consumers.
Rapid growth
According to figures from Datamonitor, the secured loan market is now worth around £6 billion. It has grown rapidly in the last 10 years, recording annual growth of more than 50 per cent in the past five years alone, before reaching its peak in 2003 when gross lending touched £7 billion. Towards the end of 2004, the market started to dip to its current levels, although Datamonitor estimates the second charge market will pick up by the end of this year and grow steadily to £6.3 billion by 2010.
In much the same way that regulation helped transform the mortgage industry by raising standards, bringing innovation and pushing out the cowboy players, the formation of the AFB and anticipation of new rules has already resulted in a change of approach of many in the industry and some great new products.
This is particularly good news for mortgage brokers because second charge loans are a natural fit with their existing products and knowledge base. The potential of second charge lending is borne out by research carried out by AMI among its members in advance of the launch of the AFB, which found that 44 per cent of brokers already offered advice to their clients on secured and second charge loans, with 66 per cent of members intending to offer this kind of advice at some point in the following 12 months.
Mortgage intermediaries will be familiar with the personal needs and financial circumstances of second charge customers, and in fact they are likely to have many potential customers among their client bases. Not only could second charge loans be good business for mortgage brokers, they are also an important option to have in an adviser’s toolbox.
For example, a second charge loan could be ideal for a credit-impaired borrower who wants to raise cash or consolidate other debts, but who does not want to remortgage the entire debt because switching from their mainstream home loan to a specialist product would be more expensive than taking out an additional second charge loan.
Another possibility would be the self-employed person who needs to find extra business funding but does not want to remortgage their property to raise the money. Some modern second charge loans are more flexible than traditional products and allow self-cert, which is perfect for business start-ups who do not have three years’ accounts.
Most modern second charge products are also completely fair and transparent, offering much more competitive rates than traditional secured loans, boasting innovations like one plus one redemption charges and ‘back to day one’ payment protection.
There will be a lot of talk and debate surrounding second charge lending in the months and years to come. More importantly for brokers, there will be a lot more interest from customers as well, so now is the time to take a fresh look at second charge lending.
Ian Giles is sales director at Kensington Mortgages
