United Trust Bank’s Specialist Mortgage division launched its first product offering – second charge mortgages – in June 2015. The initial launch in June was to a limited number of second charge master brokers which was gradually increased throughout the second half of the year.
In most cases, you might expect this type of project to now be operating at full throttle. However, with a not inconsiderable change taking place in the second charge market place in March, we believed a more prudent approach was called for.
With the Mortgage Credit Directive (MCD), the second charge loan, taken out by many borrowers as an alternative to a car loan or credit card debt, will now be viewed by the regulators as a full blown ‘mortgage’ and will be regulated in precisely the same way.
This is probably the right course of action. Since the credit crunch the second charge market has seen a considerable change. Prior to 2008, the average loan size was around £25,000 and the average actual term was 30 months. People borrowed for short-term consumer finance reasons and compared the cost of their borrowing on that basis i.e. to car finance, credit cards and unsecured loans. I call this the ‘jam jar mentality’ and it makes sense because they cleared these loans quickly without adding to, or substituting, their first mortgage which would have potentially been taken out with a new 25-year term.
The current situation is somewhat different. A new market has appeared of much larger loans for those seeing a second charge as an alternative to a remortgage or a further advance. Interest rates have also moved to reflect the new found status of the second mortgage with rates ranging from as little as 4.70% pa.
So what does the MCD mean in practice? Well unlike first mortgages, under the previous Consumer Credit Act regime the lender did not make an offer to the client, they invited them to take out the loan by signing the Credit Agreement after a consideration period had been completed. The lender then underwrites the loan and, if they decided to do so, issued the funds. Following the introduction of the MCD, the approach will change to the one that is familiar to the mortgage market. The lender issues a binding offer after the loan has been fully packaged and underwritten, and if accepted by the customer, completion will then follow soon after.
The secured loan industry at both broker and lender level, has come together to meet the challenging timeframe set by the European Directive which required the market to complete the MCD change over by 21 March. In view of the importance of the changeover date, the industry worked to an earlier ‘go-live’ date of 15 February and most introduced the new documentation and process on this date.
It has been a tremendous effort on everyone’s part, including the FCA and the Finance & Leasing Association who have sought to clarify the new regulations for a market that simply doesn’t exist in many European countries.
At United Trust Bank we have been developing our online system to allow brokers to complete loan application details and to issue a mortgage illustration, also known as the European Standardised Information Sheet or ESIS. This document, which is in an MCD prescribed format, enables applicants to compare the details of the intended loan with other offerings. After much hard work by many people, the broker portal is now fully functional and MCD compliant.
It’s pleasing to have now cleared the MCD hurdle and we can look forward to developing the bank’s specialised mortgage business both in terms of exploring new product opportunities and building volume. We expect to see considerable change in the marketplace as the effects of MCD work their way through the industry, and you can be sure of hearing more from United Trust Bank over the next year and beyond.