There has been a lot in the press – both trade and national – about second charge firms failing to live up to the standards set by the Financial Conduct Authority (FCA) through the Mortgage Credit Directive (MCD) recently.
It’s come after a review of underwriting standards at more than one lender and Shawbrook later confirming that it’s changed some of its criteria.
I am always a supporter of poor practice being exposed and remedied. It’s the right thing to do for the customer.
But I am inclined to think on this particular occasion, second charges are getting a worse press than they deserve.
The FCA is right to review how MCD has bedded-in at both lenders and broker firms. But I think the reality is, the press are picking up on the very worst behaviours in the very furthest outreaches of this market.
Flat fees may not be fairer
Look at the facts. While once fees were 10% at some firms, they’ve dropped dramatically since MCD came in and now sit at around 5% or 6%.
Often they’re lower than this – especially where the loan size is bigger.
The introduction of flat fees by some brokers has also been heralded as the way forward for fees on second charge.
But a flat fee is just a different structure – it’s not necessarily fairer or cheaper. It also doesn’t mean that the firm isn’t cutting customer product fees, ramping up valuation fees and then also attempting to drum up higher proc fees from the lender.
Who do you think is paying for that ultimately? The customer, on rate.
Best advice must apply
We need to be really careful that we don’t talk down the second charge market in its entirety.
Second charges are a tiny proportion of the overall mortgage market – just shy of £1bn compared to around £250bn mainstream.
But they are also a really valuable product for the right type of customer in the right circumstance.
I think we’re in danger of forgetting that the principle of best advice always has to apply – the broker advising their client to take a second charge is never going to do that where it doesn’t make financial sense for the client.
This doesn’t have to mean that second charge mortgage rates should be the same as remortgage rates. It doesn’t mean that fees have to be the same either.
It just has to mean that in the instance a second charge is recommended to a client, it’s the most appropriate product for them.
Aim to improve the reputation
All seconds should be compared to a remortgage or further advance, and in the vast majority of cases, a second charge won’t be the right advice for the customer because the costs are higher.
But in the minority where it is the right advice, it provides valuable financial relief for thousands of borrowers each year, particularly those who need to consolidate more expensive debts and who are prepared to pay a fee for a much lower rate.
We should all be aiming to improve the reputation of the mortgage advice market and ensuring that all firms are up to the standard required of them is key to achieving this.
But bad-mouthing an entire sector and industry runs the risk that we tar everyone with a brush that should really only apply to a very few, who should rightly be stopped if and when customers come to detriment.