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Second time lucky

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  • 15/02/2002
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With flexible terms, a speedy service and no up-front fees, second charge mortgages can be a practical way of helping clients raise funds

In the prevailing economic conditions it is not likely that many mortgage intermediaries would waste time trying to talk a determined client, with serious equity in their property, out of remortgaging. After all, they would probably end up with a better mortgage, a better rate, and cash in their hand ‘ not a bad combination.

But for some of those cash-starved customers it is equally possible that an informed adviser might want to reflect on an alternative option that is growing in popularity for a number of good reasons.

A second charge mortgage may not be right for everyone, but for many people looking to take a ride on the equity locked up in their house, it can provide the perfect vehicle.

True, there has probably never been a better time to get a mortgage. But by the same token the secured loan’s time has finally come.

A secured loan ‘ a loan secured by a second charge on an already mortgaged property ‘ could hardly be easier to explain or understand. However, although it is secured on the property, it is not a mortgage in the generally understood sense of the word. A major reason why it offers so many advantages for the right applicant is because the time-consuming and costly process of obtaining a mortgage does not apply.

On the up

Secured lending may still be something of a Cinderella product when compared to the total volume of mortgage and remortgage loans, but its growth rate from 1998 to 2000 was higher than both. Gross first mortgage advances grew by around 25%, remortgages by around 50%, but the volume of secured lending almost doubled. Market analyst, Datamonitor, predicts this overall trend is set to continue.

Interestingly, however, while brokers introduce some 60% of all mortgage business, only 11% of the estimated £13bn of secured loans business in 2001 was broker-introduced. Research suggests that while 35% of all secured loan customers go to an IFA for advice, only 10% choose the loan recommended by an IFA.

Nevertheless, in 2000 secured and remortgage business together accounted for 36.7% of gross advances. The UK’s total secured and remortgage balance in 2001 of £140bn indicates the increasing propensity for customers to switch mortgage provider and take advantage of the equity in their home.

A secured loan is quicker and simpler to access, as well as more convenient and cheaper in terms of up-front charges and costs than a remortgage.

Not only are secured loans cheap and convenient to set up, acceptance is also easy. Research indicates that some 80% of applications are accepted on day one and 82% of proposals are paid out overall.

Evidence that customers are taking secured loans more seriously for heavyweight borrowing is proven in the fact that their size is growing, with the average advance up from £12,000 in 1998 to over £15,000 in 2000.

Some 60% of secured loan business comes from the 31-45 age group, and 20% from those aged 46-55. The fact that 45% of all secured loan applicants are based in London and the South East is a sure sign that freeing up equity in the family residence is one of the prime factors in their growing popularity.

Debt consolidation

Another factor is economic uncertainty. Borrowing thousands on a whim to head off and enjoy the good life until the money runs out is a nice idea, but according to The Finance and Leasing Association Survey 2001, 58% of secured loans are used primarily for debt consolidation.

The fact that many borrowers want to use a secured loan to straighten out their debt is another reason why many would prefer to source these funds from a specialist rather than from a high street lender.

Borrowers might avoid their own mortgage provider for fear of giving off the wrong signals about their financial situation.

For many secured loan applicants, the importance of this issue can not be underestimated. Specialist lenders are also, incidentally, more likely to lend to a homeowner with an adverse credit history.

One of the great things about a secured loan is that there are no restrictions on how the funds may be used.

Given the fact most intermediaries are not getting their share of secured loans business, it is ironic that one of the most competitive secured loan deals in 2001 was offered exclusively through intermediaries.

In that case a rate of 7.9% was applied to a minimum loan of £35,000, with an upper limit of £50,000, borrowed over a negotiable period up to a maximum of 25 years (some lenders will generally restrict the term of a secured loan to 10 years). The maximum loan to value was 80%.

The 7.9% APR rate may seem high compared with current high street mortgages but, comparing the deals in other ways, the up-front benefits of the secured loan take some beating.

The advantages include no processing fees for surveys, solicitors, valuations and the like, and no redemption fees either. Up-front costs may be less, but with the right lender you should still be able to negotiate a flexible repayment scheme over a term of up to 25 years.

As regards your client getting their hands on the money, straightforward applications are likely to be paid out within seven days. This compares to the average remortgage wait of six to eight weeks.

Secured loans are also flexible, with daily calculation of interest and the ability to make overpayments ‘ which work together to reduce the actual term and interest payable.

Put simply, benefiting from equity tied up in the home is growing in popularity, and a secured loan is the most hassle-free way of going about it.

Once you have advised a client on a secured loan, submitting an application to a specialist lender should be easy. However, it is important to make sure the information on the customer’s application form is accurate and complete. It is normal practice for the broker’s commission to be paid when the customer receives their cheque.

The icing on the cake? From an adviser’s point of view, a secured loan does not just pay good commission rates ‘ which can, incidentally, be supplemented by the sale of a payment protection policy, as with a mortgage ‘ but it can also free up your client’s cash to invest in other financial products.

Gerry Bell is marketing manager (secured lending) at First National

sales points

Second charge mortgages can release equity for clients who are refused a remortgage or further advance.

The majority of secured loans are used for debt consolidation.

Unlike remortgaging, there are no up-front fees to pay and borrowers can receive payment within seven days.

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