MortgagesApr 5 2017

Mortgage firms feel the heat

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by
Mortgage firms feel the heat

A lack of accountability when it comes to sales practices and affordability assessments means that the second charge mortgage market has historically occupied the niches of the wider industry.

But times have changed.

The implementation of the Mortgage Credit Directive on 21 March 2016 brought the second charge mortgage market within the Financial Conduct Authority’s remit.

In its original consultation document on regulating the second charge market, the FCA predicted that its proposals were likely to result in a 20 per cent reduction in lending volume – amounting to about £100m.

Lending volumes of the entire second charge market are difficult to source, but the latest figures by the Finance & Leasing Association, which releases the aggregate lending data of its members, offers an insight into how the market has fared since the EU directive came into force.

It shows that second charge borrowing dipped by 6 per cent in January 2017 year-on-year to £69m.

There was a 4 per cent fall in second charge mortgage lending during the three months to January (£218m), but over a 12-month period lending rose by 1 per cent to a total value of £869m.

Fiona Hoyle, head of consumer finance and mortgage finance at the FLA, said: “It is important to remember that we are still in the bedding-in process. We are just over one year into the new regime and we cannot underestimate the significant amount of change that has happened. As the market adjusts to the new regulatory environment, the lending levels will change.”

She added: “There have been a couple of new lenders that have entered the space in the last 12 months, which is a testament to the strength and optimistic outlook of the sector.”

Bradley Moore, managing director of Brightstar Financial, said the year-on-year figures were "blurred" due to a spike in business volumes three months before the MCD came into effect.

He said: "All comparisons are therefore disingenuous because of this. That said, it is clear that there is work to do to ensure IFAs and mortgage advisers are fully embracing the sector."

The second charge market was previously regulated under the Consumer Credit Act.

Some CCA provisions were maintained, including the prohibition on interest being increased on default, the right to complete payments ahead of time and the right to a rebate on early settlement.

As a result of the change, many of the rules governing the first charge sector now apply to the second charge market. These include the requirement for firms to provide an “adequate” explanation of a product’s essential features, issue a binding offer and a seven-day reflection period at least.

Notably, brokers are now mandated to provide clients with a European standardised information sheet disclosure document by 21 March 2019. This replaces the key facts illustration requirement.

Lenders in the first charge space have been forced to slash rates on products and/or create innovative offerings in order to survive in an increasingly competitive environment – to the detriment of their bottom line.

As many lenders have entered the sub-prime sector to supplement their core business, there is a sentiment that the MCD could also tempt mainstream lenders to dip a toe into a burgeoning market and take market share away from existing lenders.

Harry Landy, sales director of master broker Enterprise Finance, said: “I can’t see this happening in the short term. The second charge market is simply not big enough for the mainstream lenders to occupy. The size of the second charge market is £1bn, whereas the size of the mainstream market is around £242bn.”

Mr Moore said: “Mainstream lenders are lending in the seconds market right now, either directly or via warehouse lines to second charge lenders. I think it’s unlikely that many more will join the sector while its numbers remain as they are.”

Master brokers have traditionally held all the aces when it comes to accessing second charge lenders, but changes under the MCD has meant the emergence of new challenges.

The “significant transition” the second charge market has undergone post-MCD is the reason cited by market-leading master broker V Loans for its decision to pull out of the sector.

The advent of second charge lending panels among distributors also threatens to erode the earning potential of master brokers. Adviser network TenetLime and Legal and General Mortgage Club are two large distributors that have launched such a proposition for their brokers.

Mr Landy questions whether network and mortgage club panels are too restrictive. He said: “Competition is good for consumers, but clients of brokers who use a panel of second charge lenders are restricted in their choice and only see a snapshot of the marketplace, whereas we offer the full picture.”

Many lenders do not offer their products directly so brokers who opt to go direct cannot be sure that they can source the best deal for clients, according to Mr Landy. He added master brokers have access to sophisticated sourcing systems that trump those used by most intermediaries. 

He said: “The second charge application process is not as straightforward as that adopted in the first charge space. Brokers come to us because they appreciate that they do not have adequate knowledge on the criteria of the different second charge lenders in the market.”

Most brokers have elected to stay and work with their chosen master broker since the MCD, according to Mr Moore.

He added: “Feedback that we have had from intermediaries is that the ‘direct to lender’ channel in seconds remains incomplete in product and lender choice, which naturally creates a challenge in terms of suitability of advice.”

Master brokers have often come unstuck by the amount they levy for their services.

A host of master brokers, including Complete FS, have opted to axe master broking fees and move onto a flat application fee structure in the wake of the changes. At the time, Tony Salentino, Complete FS director, said high master broker fees are one of the main reasons advisers are reluctant to adopt second charge loans over the remortgage alternative.

The increase in standards ushered in by the MCD is likely to trickle down the charging models of master brokers, Ms Hoyle said.

The lack of knowledge among brokers is one of the more pertinent factors that threatens to hinder the growth of the second charge market, according to Mr Landy. He said some advisers have struggled to shrug off the “outdated view that second charge loans are a last resort product for individuals with bad credit who would be turned down for borrowing mainstream lenders and still command eye-watering rates of interest."

Interest rates on second charge mortgages are higher than traditional first charge loans because they pose a greater risk to lenders as the repayment can only be made after the main mortgage. However, rates have plummeted – with deals now starting at 3.83 per cent, Mr Landy said.

Ms Hoyle said: "We need to look at what can be done to better educate brokers on second charge mortgages as well as the wider public. The market has been under the radar for a long time, but second charge mortgages can be suitable solutions for many."

Under current rules, adviser firms are not required to broaden their services to include both first and second charge mortgages, but if a client with an existing mortgage seeks to borrow more, brokers are stipulated to inform the individual of other forms of borrowing that are available that may also meet their needs.

Mike Richard, director at London-based Mortgage Concepts Associates, said that the second charge market is an area in which mortgage advisers should be well versed, adding: “I do not think you can offer a full and complete mortgage advice process if you do not have the ability to advise on the second charge market.

"There are situations where the client is on an extremely competitive mortgage deal. Here, as not to lose the competitive rate of interest, taking out a second charge loan might offer a better blended solution than refinancing.”

On the future of the second charge market, Mr Moore said: "Second charge mortgage numbers will continue to grow over the years ahead, because quite simply, for some customers they are the most appropriate solution. The sector has its own trade body, the Association of Finance Brokers. Perhaps rather than reinventing something that  already exists, second charge brokers should show their support by paying for membership of the AFB."

Myron Jobson is a features writer of Financial Adviser

 

Key points

The Mortgage Credit Directive brought the second charge mortgage market within the Financial Conduct Authority’s remit.

Brokers are now mandated to provide clients with a European Standardised Information Sheet disclosure document.

The lack of knowledge among brokers is one of the more pertinent factors that threatens to hinder the second charge market.