Few positives emerged from the dark days of 2008, but if there’s one, it’s the lesson, learnt by firms from many sectors, that there is a risk to being overly reliant on just one revenue channel.
It was nobody’s fault, of course, but almost overnight, many businesses discovered just how geared they were.
For brokers, it was especially bad. Their fates were tied to the fate of the residential mortgage market and, when rates were cut to 0.5% and criteria went crazy, many suffered.
Increased diversification
Since 2008, a growing number of brokers, partly out of necessity, and partly out of an active will to diversify into new areas, have broadened their propositions considerably.
This is a hugely positive development and I have no doubt it will serve them well in the future.
Residential mortgages remain their core activity, and rightly so, but many of today’s brokers are far more diversified – deriving an income from adjacent markets such as commercial mortgages, development finance, bridging and secured loans.
It’s the value of secured loans as an extra revenue generator that I want to talk about today.
Paying commission of 2%-4%, they are producing very strong revenues for a growing number of brokers – and perfectly complement their existing propositions.
Secured loans skyrocket
Over the past 12 months, the secured loans market has skyrocketed. New lenders have piled into the sector, competition on LTVs and rate has increased and demand has soared.
The primary driver of this demand is the fact that many homeowners are on rates so low that if they need to free up extra cash – whether to consolidate, carry out home improvements, pay a tax bill or buy a car – a remortgage is often ill-advised.
And it’s not only owner-occupiers that don’t want to remortgage. Many landlords are also on exceptional term mortgage rates and the last thing they want to do is remortgage off them in order to raise extra cash. A buy-to-let second charge can be the perfect solution.
The long and the short of it is that the remortgage business the broker misses out on can easily be substituted by a secured loan, or ‘second charge’ – whether on the client’s primary property or across their portfolio.
Secured loans explained
If you’re new to secured loans, loans generally start from around £5,000 and go up to £150,000, with terms ranging from 5 to 30 years (with payment holidays, as on a term mortgage, often available).
In some cases it’s possible to get more than £150,000 – with loans upwards of £500,000 available to those with significant equity in prime properties.
As a rule of thumb, employed applicants can get up to 95% LTV, while self-employed applications are usually up to 75%, at a push 80% LTV.
Interest rates on secured loans can be as low as 5.5%, although the rate will ultimately depend on the size of loan and the credit profile of the applicant. Clients can choose whether to opt for fixed or variable rate loans.
The financials
Unlike mortgages, there are no up-front fees payable on application for a secured loan. There are costs associated with the application, such as arranging a valuation and processing, but most ‘distributors’ of secured loans, including ourselves, take care of these so clients have nothing to pay initially. Instead they are rolled into the monthly loan payments.
Processing times are far shorter for secured loans than mortgages, with a typical completion time of three weeks. Interest payments can also run for a shorter period than the client’s mortgage, which can be handy.
It’s worth noting, too, that the ERC on a second charge mortgage is usually just one month’s interest, so nothing too punitive. In short, they are a very flexible secured loan product.
All in all, secured loans are definitely worth a look and should be on all brokers’ radars as an extra revenue generator.
