Mortgage brokers currently looking at the opportunities presented by secured loans will find a mixed picture. Undoubtedly, things are tough out there, and it is more difficult to place the cases that would have been easy six months ago – but that is the story across the whole lending market.
The good news is that borrowers remain keen to take out loans. Borrowers still want that car, the wedding or that extension and they continue to turn to secured loans to provide it. As it becomes harder to maintain levels of mortgage business, secured loans are still a realistic option, and although it is getting tougher, it is still possible to place business, which can provide an additional source of income to bolster business levels.
Changes afoot
If advisers who have dealt in the secured loans market sporadically in the past are thinking of doing so again, using a master broker will always be the best bet. Even so, there are a number of recent changes that advisers need to be aware of. The one which most mirrors the mortgage market is the more cautious approach from lenders, especially regarding self-certification. Loan-to-values (LTVs) are still reducing across all product types and some lenders have reduced their LTVs to as little as 50%, in order for them to survive the market conditions. However, there are others that still have much more realistic LTVs.
Lenders cannot be criticised for taking a more cautious approach, as they must react to the market conditions, and hopefully this will mean that most of those who are in the market now will still be here in a year’s time. However, the secured loans market has already seen a high number of casualties, and it is a brave man who would bet on every firm that operates now still being around when conditions improve.
One of the problems in finding a loan for clients is that the cost of living is still rising so affordability ratios become even more problematic. What will also help clients is the pending Consumer Credit Act (CCA) that has been introduced to all loans from the beginning of this month. This Act is concerned with protecting the client from being unduly influenced to take out a loan and therefore it will swing things heavily in favour of the client.
The Act offers consumers much more protection: it does not allow the client to be charged an up-front fee, other than a £5 administration fee. Advisers will also not be allowed to charge their clients for any valuation done of their property, in case it influences their judgment to take a loan.
From a firm’s first conversation with a client, there will be a consideration period of eight days before they need to sign the paperwork, and then a further eight days before the adviser may contact them again. However, if the client does sign the form in under eight days, it will hasten the process, and if they are in a hurry for their money, it can still be processed in the same quick timeframe that it could before; but in general, it is likely to mean that secured loans may take slightly longer to get through.
Good for borrowers, but not so for lenders, is the fact that early redemption charges (ERCs) will be considerably lower, so it will be much cheaper for a client to pay off their loan early. Under the CCA, borrowers need only pay one month’s interest, plus the notice period.
Early redemption charges do make up a sizeable proportion of lenders’ income, so there will be implications from this. If lenders do not make money from ERCs in the way they have been accustomed to, they will need to make it somewhere else, so be prepared to see higher fees on loans and also on interest rates.
Another factor that is likely to put pressure on interest rates is the impact of Treating Customers Fairly on payment protection insurance (PPI). Lenders obtain a large income from PPI, and this has kept interest rates artificially low. If single premium PPI is pushed into oblivion by TCF, as seems likely, this will have an upward effect on interest rates. Some bigger secured loan brokers have already stopped selling lenders’ PPI and many now have their own suite of insurance products.
These factors, together with challenging market conditions, make it harder to place business than it was last year, and loan products will appear less attractive, as many lenders just do not want to take on higher risk lending. This can push a client, who six months ago would have been classified as mid-range, to adverse lenders on much higher rates. It also means that as with mortgages, a base rate drop will not necessarily result in cheaper loans.
The solution is to use IT and sourcing systems to streamline a broker’s business, so that it can deal with twice as many clients but for the same profit as before.
There is no doubt that the introduction of TCF and the CCA at the same time, together with the constricted market conditions, makes life more of a challenge, but secured loans still offer a way of diversifying a firm’s business and spreading the risk of income shortfall, adding a source of new clients and another, relatively healthy, income stream, which almost everyone could do with right now. n
Robert Ridge is managing director of Help Personal Finance
