At The Specialist Lending Event, Brightstar Financial CEO Rob Jupp noted that fees had fallen 30-40% since the implementation of the Mortgage Credit Directive (MCD).
However, the Financial Conduct Authority’s (FCA) review of second charges has once again turned the spotlight on the sector.
So this week, Specialist Lending Solutions asked its panel whether second charge fees were still too high?
Jane King, mortgage adviser at Ashridge Private Finance, says the level of master broker fees has put her off referring clients for second charge products.
Matt Cottle, CEO of Specialist Mortgage Group, argues that first and second charge mortgage broker fees are not comparable.
Sebastian Riemann, mortgage consultant at Libra Financial Planning, believes master broker fees do not meet the regulatory objective of treating customers fairly (TCF).
As any adviser who is classed as independent knows, they must consider the merits of a second charge loan when advising clients looking to raise capital.
I have found myself in this position many times and often it is not appropriate to remortgage due to early repayment charges on the clients existing mortgage, or for a myriad of other reasons.
When this happens my heart sinks as I know that now I am going to have to consider a second charge loan which means I am going to try to explain away the exorbitant cost of such an arrangement even though I do not charge any added fees myself as I just cannot justify any further cost.
I am at a loss to know why packagers charge thousands of pounds for packaging these loans and until this situation changes I am finding it almost impossible to recommend such an arrangement to any of my clients and we generally only proceed if the requirement for funds is urgent and there are no possible alternatives.
I look forward to the FCA review on this and would like to hear from a master broker who feels that they can justify these fees.
My industry colleagues do an excellent job of expediting difficult cases and getting clients the money they need.
I do not think that master broker fees are too high. Commission paid by lenders is only sufficient to cover a portion of costs, we have to charge broker fees to survive. The average Y3S Loans broker fee is 5.5% of the loan advance.
We operate a very strict broker fee policy to ensure that customers are not over or under-charged. First charge and second charge mortgage broker fees are not comparable, the basic reasons for which are:
- Second charges have smaller balances than firsts; a 5% fee on an average £50,000 second charge is equivalent to a 1% fee on a £250,000 first charge.
- There is almost always at least one problem with a second charge loan application; it takes a lot more time to package a second charge than a first. A second charge application is a specialist product and almost all mortgage brokers pass it on rather than tackle it themselves.
- First charge brokers expect the client to pay for every part of the application. Second charge brokers almost always pay for every part of the client’s valuation (average £350), mortgage reference from the first charge lender (average £85), searches, document couriers to expedite the application (£180); everything is covered by the broker.
- The customer can pay up front but 99% choose to add the fees to the loan. If the application cancels or declines, the packaging broker loses out. Most first charge broker are unwilling to pay out on all fees, but with second charge brokers it’s an expected part of the process.
- First charge mortgage brokers are the single most fruitful source of leads to second charge brokers, and rightly, they expect to be remunerated. At Y3S Loans the average broker commission in 2017 was £1,096. If the client prefers not to pay this up-front then the broker’s commission has to be included as part of the fee.
Speaking only for Y3S Loans, there is less than 20% profit left over once all packaging fees have been paid, and that does not take account of any abortive costs.
Fees on second charge loans have significantly changed since they were brought under the remit of the FCA, and rightly so. There should be no difference between the first or second charge lending models, besides the pricing of interest rates.
The process should be the same where brokers are able to utilise packagers or approach lenders directly. This direct to market access seems to lag a little and there can be great benefit from using packagers as well, so there are varying models and the regulator does encourage that a one size does not fit all.
But there is a distinction between offering exceptional service and being unreasonable and this is really where the second charge loan industry has had a bad name in the past.
I have viewed second charge loans as a last resort or inferior option largely due to the high interest rates and large up-front charges by secured loan brokers and/or packagers – often ranging between 5% and 10% and which significantly increased the amount clients had to repay over the loan. Furthermore the market was not regulated in the same manner as the first charge market, quotes often changed from first enquiry to when the offers arrived and many additional fees were chargeable at the point of application. It just never seemed as reliable.
One of the key principles that has shaped the first charge market has been Treating Customers Fairly (TCF). While not a strict set of rules per se, it offers very clear guidance on what we should be doing and keeping the client outcome at the forefront of all transactions.
I have never supported a fee cap or for the regulator to set out an advised fee scale, mostly due to firms costs and demographics varying vastly in different parts of the country.
However we should be paid fairly for the work undertaken and in some instances this would be more extensive than others. Similarly I have always considered that a 1% fee is a large amount and would act as a maximum as I cannot envisage an application to warrant more work than this under any circumstances. I have several instances with cases stretching over several years with private banks and specialist lenders, but this still hasn’t warranted higher fees. It is of course reasonable that a firm covers their costs and makes a reasonable profit so that we can continue to provide a much-needed service.
So why have second charge packagers felt the need to charge 10%? The only answer I have received which appears sound is simply that they got away with it and the clients accepted these. That doesn’t make it right however, nor is it treating anyone fairly. The fact that many clients are not aware of other alternative options and possibly feel embarrassed by having fallen on hard times, does not warrant them being taken advantage of.
So what would be fair? For second charge loans to be treated the same as first charge loans and the clients to benefit from having an alternative funding option that is fully protected and regulated. There may will be some that charge more and some that charge less, but these fees must be reasonable in all instances.