The introduction of the mortgage credit directive (MCD) in March last year was a game changer in that it brought second-charge mortgages under the FCA’s mortgages and home finance: conduct of business (MCOB) rules.
Many believed it would provide a boost to the number of second charges written because of the rules requirements that effectively placed the products on the same playing field as first charges. At the very least, advisers would need to consider second charges alongside remortgages and further advances when dealing with clients who were looking to raise capital.
However, as many advisers will know only too well, up until that point the second-charge – or secured loan – market had been a very different one to first charges, with its own unique set of circumstances. Also, the master brokers in the sector had a somewhat different role. Up to that point they tended to dominate distribution of the products and run their own fee-charging structure that looked very different to the one offered by first-charge mortgage operators.
There were several reasons for this, not least the fact that there tended to be a lot of fall-through second-charge cases, which required master brokers to pay up-front for client services that did not necessarily result in the case completing. This meant that, effectively, those customers who did complete were paying for those who did not and this resulted in large fees being charged.
It was a fee-charging system that was prevalent across the board and seemed to be a major reason why many first-charge advisers did not actively consider second charges. Add in the perception that seconds tend to be more expensive and have an image issue, with customers often being uncertain about how they work, and you can understand why the seconds market was still facing considerable challenges, especially with the move across to the new regulatory environment.
So what has happened in the second-charge market since MCD came into force in March 2016? Well, master brokers still hold the balance of power when it comes to second-charge products, with many lenders continuing to distribute their offerings via this channel rather than giving access directly to advisers.
Interestingly, though, we have started to see master brokers change their fee structures, opting for flat fees at more recognisably first-charge levels, rather than the thousands of pounds some still charge.
Affordability has also been a big factor brought about by MCD, given these rules are much more prescribed than the previous Consumer Credit Act days. Lenders have had to look to innovate when bringing new products to the market and some of these innovations revolving around criteria, such as multiple income sources and accepting zero hours contractors, reflect the changing workplace and the needs of today’s employed.
To also assist with affordability, client ages at the outset are rising, which means certain lenders, including Precise Mortgages on its second-charge buy-to-let product range, are now lending to borrowers past their retirement.
- Master brokers still hold the balance of power when it comes to second-charge products.
- About nine lenders now offer products above the standard 75 per cent LTV.
- The biggest test for any new lender is how innovative they can be with the product range.
Also, in many areas second-charge lenders can be more flexible than their first-charge counterparts, especially when it comes to adverse credit. There are lenders, such as Prestige Finance and the Together Group, that allow clients to apply with recent credit issues rather than historic problems, although most of these will need to have a justified circumstance or it will need to be linked to a life-changing event.