Time to get your head around second charge
Steve Harness is commercial director at The Loans Engine
Look at any Mortgage Credit Directive (MCD) flowchart for mortgage advisers – take the Paradigm Mortgage Services one available on its website (www.paradigmmortgages.com) as a good example – and when it comes to second charge mortgages you will be faced with this first question:
Are you going to give advice on second charge loans post-21 March 2016?
By now, hopefully, most firms will have made up their mind which way to go – (yes or no) – and will be working through the changes they need to implement in their business in order to secure compliance. We anticipate significant numbers of firms answering ‘no’ to such a question and utilising the services offered by master brokers like ourselves in order to meet their requirements in this area.
However, there will be those who answer ‘yes’, and this can take you down a rather different path in terms of the needs of your business and your customers. It means that the responsibility of that advice rests with the firm, rather than with the master broker. While advisers again may use a business like ourselves to package the case post-advice, firms need to be clear that the advice comes from them and therefore they need to be 100% confident in the systems and processes they have in place to support its delivery.
As a business which understands what it takes to deliver in the second charge mortgage market, we are quite aware of the commitment, resources, investment, etc required to get this right. Take for instance, what might seem an easy part of providing the advice which is dealing with the second charge lenders and placing business through them. At what point do you have to stop, in terms of the number of lenders you actively deal with, to be able to provide your customers with a good value outcome?
The answer, you might be unsurprised to learn, is that you’re not going to be able to rely on a lender panel of two or three. We believe that mortgage brokers offering advice, and dealing direct with lenders, will need to have relationships/with at least a dozen or so lenders to offer a good outcome for their clients.
In comparison, we actively use 17 lenders and have our own loan sourcing system, Nexus, which has taken us 13 years (and a team of full-time developers) to get to where it is today. For any mortgage broker considering their ability to advise, deal direct, put enough lenders on their panel, learn the criteria, source efficiently and effectively, learn the packaging requirements, etc, they have to understand what it truly takes to do this. And, if you think you can do it properly without a system like Nexus then you may need to reconsider your approach.
Panel size is going to be crucial, and it can’t just be a window-dressing exercise. If a loan broker thinks they can advertise a large panel on their website, but once the customer is ‘through the door’ (so to speak) then always ‘drop down’ to the same two or three favourite lenders who are easiest to package for, are not picky about the quality of administration and (needless to say) pay the most commission, then they need to consider the implications this will have.
In an FCA-regulated world, one wonders how long loan brokers of this mindset are going to get away with these practices, and therefore any mortgage advisory firm who thinks they can mirror such activity, is going to be putting themselves in the regulatory firing line. Not that we are expecting mortgage advisers to move down this path – after all, they have been under the spotlight of a statutory regulator for many years and understand the importance of transparent compliance and customer outcomes. So, why would they take such a risk now?
In terms of lender panel size and use, mortgage advisers will need to follow a similar model to what they have been undertaking in the first charge arena. In our business, we always sell the cheapest suitable monthly repayment, and no individual lender takes more than an eighth of our business. Hence, no individual lender on our panel of 17 is cheapest for more than one in eight customers. So, if a loan (or mortgage) broker favours two or three lenders, it means the vast majority of their customers are going to get a raw deal.
It’s these types of considerations that mortgage advisers, who are choosing ‘yes’ to second charge mortgage advice on those flowcharts, will really need to get their heads round. Given those intensive requirements, it may well be that utilising a master broker, like The Loans Engine, who can offer all the above, could prove a much more appealing opti