Seconds, bridging and commercial finance will be important adviser tools in 2021 – Westley
Instead, understanding how much is beyond your control, puts greater emphasis on planning and implementing those things that you can change.
So, when it comes to 2021, think about what steps you can take to make your business more diverse and resilient to external changes.
Are there products and services that you could offer which would help you to better serve your clients? And is there a way of accessing those without diluting your core areas of business?
Whether or not the market continues at its current pace into next year remains an unknown, but we do know that the events of 2020 will impact the demand for finance and the way that people borrow money in 2021.
For example, in the residential market fewer people will be able to claim to have vanilla circumstances, and the role of specialist lenders and their expertise in individually underwriting applications will continue.
Other trends too, should drive demand for particular types of products.
Second charge mortgages
Data from Rightmove has shown that as a consequence of being locked down home movers now want more space than they did previously, and so do homeowners.
Home improvements and extensions are expected to be popular in 2021, and a second charge mortgage can prove a cost-effective way of financing the work.
Second charges can also prove a good choice for some people who want to consolidate debt and may prove a useful tool in helping clients to lower their monthly payments and organise their finances as we emerge from the pandemic.
A trend we have seen in the second half of 2020 is the scarcity of products in the first charge market available up to higher loan to values (LTVs).
This is also an area where second charge lending can help, with some lenders offering opportunities to capital raise that might otherwise be limited by the LTV limits of a first charge lender.
If there is one product that is well suited to provide fast and flexible funding in a quickly changing environment, it’s bridging finance.
Whether it is to save a transaction, secure a quick purchase, buy a run-down investment property or release capital for business purposes, bridging used properly can be a versatile tool for any broker and will prove an important product next year.
At some point, government support packages and loans for businesses will end, but it’s clear many businesses will continue to require access to capital – so it’s anticipated there will be high demand for commercial finance in the next year.
This provides you with an opportunity to speak to your self-employed clients, not just about their mortgage requirements, but also their business finance.
These are just three areas of potential opportunity for brokers in 2021, that could provide additional and important streams of income.
West One cuts second charge rates for self-employed borrowers
Self-employed borrowers who are the main income earner will need evidence of minimum income of £40,000 through their latest SA302 and have been trading for a minimum of two years.
The lender has also added a product allowing parents to take out a second charge loan to use as a gifted deposit with a maximum loan to value (LTV) available of 75 per cent.
The second charge is placed on the supporting family member’s home, not the property being bought.
Rates on all ranges start at 3.99 per cent.
West One sales director Marie Grundy (pictured) said the family support product highlighted the flexibility of second charge mortgages and how they can work in tandem with the first charge market.
“This is particularly relevant at a time when there have been significant supply issues with higher LTV products in the mainstream market mainly affecting first-time buyers,” she said.
She added: “Our latest set of changes will be of significant benefit to self-employed borrowers whose needs are often more complex and best served by a more bespoke approach to underwriting.”
AMI fears second charge and equity release advisers not heeding FCA warnings
The Financial Conduct Authority (FCA) issued a Dear CEO letter last month to all mortgage intermediaries highlighting concerns with advice in the two sectors.
Speaking to Specialist Lending Solutions, AMI chief executive Robert Sinclair (pictured) said while the sectors had been separated in the FCA letter, there were common threads between second charge and equity release.
“There are concerns people start down that journey and then end up with that product no matter what they say,” he said.
“Also, all the costs end up being paid by those who complete and there are concerns about quality of advice around debt consolidation.”
He added: “I’m concerned that both markets aren’t listening to what the FCA has been saying to them. It is continuing to ask them to think about changes to business models.”
Poor quality fact finds
Sinclair noted that it was expected the FCA would return to examine the second charge sector in 2020 with the coronavirus pandemic delaying that.
But he said the regulator had raised concerns about the quality of advice around debt consolidation in the sectors and the issue of borrower vulnerability.
“They don’t see a great deal of good advice in the suitability letters that go out to people, there’s poor quality in terms of fact find and suitability,” he said.
“This isn’t a standard mortgage and often it’s being taken because they have debt distress, so there has to be a higher level of care.”
Sinclair added that AMI would be talking to its member firms about all the risks and issues but highlighted that the FCA’s vast data pool now meant it was much harder for firms to hide from the regulator’s scrutiny.
FCA scrutiny makes sense
Rob Jupp, CEO of The Brightstar Group, said it was understandable people reacted to news of an FCA review with a jolt of suspicion that something must be wrong with a sector, but noted it was the job of a regulator to review the markets that it regulates.
“Second charge mortgages have come under the remit of the FCA for a relatively short period of time and so it would make sense that it pays particular attention to the market to ensure that it is operating to the standards expected in other areas that fall under the regulator’s charge,” he said.
“The FCA may well find incidents where the advice process has not been up to scratch or fees are deemed to be excessive, but it will also find a lot of examples of excellent consumer outcomes and very good practise by firms that operate across the spectrum of secured lending, treating each element with the same level of professionalism.
“My biggest concern about the second charge market is not that the FCA is looking at it, but that so many brokers still are not, and that by excluding this important product from their advice process they are denying some of their clients the best outcome for their circumstances.
“If an FCA review of the second charge market provides a reminder to brokers that it sits on a level playing field along first charge lending then that can only be a good thing.”
Business models are changing
Brilliant Solutions managing director Matthew Arena agreed that the industry was improving with the benefits of the FCA’s post-credit crunch changes and added that a stable industry was positive for all.
“The fact they are going to revisit this means there are some issues to get to grips with,” he said.
“We focus on our own business and operate very differently to many others; that means low fees and an obligation to consider appropriate alternatives.
“Fees was a longstanding problem in the industry but so much has improved with more businesses than ever operating a similar low fee business model to ours.”
He added the industry has been improving and more mortgage advisers were seeing the benefits thanks to the low fee solutions available now.
“What I will say is that secured loan advice and secured loan packaging is more in depth than it is given credit for,” he continued.
“The level of work involved in offering and demonstrating compliant advice is incredibly high so the sector can justify higher fees than standard first charge mortgages, even where the procuration fees are higher.”
Equity release dabblers
Meanwhile, yesterday in his Mortgage Solutions column, Air Group CEO Stuart Wilson said he believed the FCA’s focus in the equity release sector was on so-called dabblers.
“Historically the regulator has been concerned with advisers who only carry out a very small number of equity release cases every year, and this appears to be a warning to those who may have the permissions and authorisations to provide this advice but who are not necessarily specialists in the sector,” he said.
“In other words, of course you may be able to work in this space, but are you necessarily best positioned to be doing so?
“I suspect the regulator is potentially concerned advisers might be lured into a sector which they perceive as more lucrative, only to give advice which is not appropriate because they may not understand it fully.”
UTB brings maximum lending up to 80 per cent LTV
Its first charge residential products are available for purchase and remortgage with a maximum loan size of £500,000.
There are two, three and five-year fixes with rates starting from 4.3 per cent and the maximum loan to income is 4.5. The primary income allowed must be from those in full time employment and clients need to be in their current role for a minimum of 12 months.
The second charge loan is up to 80 per cent LTV with a maximum loan size of £250,000. It is available on two, three and five-year fixed terms with rates beginning from 5.95 per cent.
United Trust Bank has also launched a near prime residential product up to 75 per cent LTV for purchase, remortgage, interest-only and unencumbered borrowers.
The maximum loan size is £500,000 dependent on the mortgage plan.
Defaults and county court judgments will be ignored if they are over a year old, as will unsecured credit commitments if they are being consolidated.
Buster Tolfree (pictured), commercial director – mortgages, United Trust Bank, said: “Throughout this year we have released a wide range of new products, criteria and digital enhancements to help mortgage brokers write more business whilst still dealing with the challenges presented by Covid-19.
“The feedback we received has been overwhelmingly positive and many brokers also suggested that a small increase in our maximum LTVs would give them additional opportunities.”
“Although uncertainty surrounding the pandemic continues, UTB has decided to back brokers and their customers in these challenging times.
“We believe that the best way to get through this crisis is to work together, supporting brokers wherever possible,” he added.
Second charge lending up by a third in October
The packager’s secured loans index showed a 37 per cent increase in market value from £52m in September as the pandemic recovery continued.
This was also reflected in numbers of cases which grew by 31 per cent to 1,816 completions – up from 1,386.
Completions were also one day faster in October, taking on average 11 days, with debt consolidation and home improvements by far the most common uses for financing.
The index combines data from Loans Warehouse and lenders including Optimum Credit, Oplo, United Trust Bank, Norton Home Loans, Equifinance, Evolution Money and Clearly Loans.
By comparison, the official market data produced by trade body the Finance and Leasing Association (FLA) for September showed a market worth £54m with 1,424 agreements – both figures were around half that of the same month last year.
Second lockdown positivity
Loans Warehouse noted that despite the second national lockdown for England which began in November it was business as usual for the sector, with no significant changes or restrictions to criteria announced following the PM’s announcement of a second lockdown.
It added that this time around there was no restriction on physical valuations and the industry was continuing to offer products available using desktop or remote valuation models.
“The optimism stems from several lenders announcing securitisations in recent weeks,” said Loans Warehouse managing director Matt Tristram.
“First we saw Pepper Money owned Optimum Credit announce the first securitisation specifically for second charges since the start of the pandemic to the tune of £277m, a huge easing of criteria followed to ensure a return to pre-covid lending levels in the coming months.
“West One parent company Enra Specialist Finance also announced its first ever securitisation of £267m to be split across their first and second charge products.”
The firm has also predicted the sector will double in value in the final three months of the year, after doing so from May to August.
Second charge volumes almost halve in September – FLA
There were 1,424 agreements during the month, down from 2,355 a year ago. The value of new second charge business also fell in September to £56m, a 46 per cent decline.
On a quarterly basis, there were 3,524 new second charge agreements with a total value of £139m, annual declines of 52 per cent and 57 per cent respectively.
Despite the annual drop, this was the best performing month for the second charge market since March.
Fiona Hoyle, head of consumer and mortgage finance at the FLA, said: “As the UK enters a new phase of lockdown restrictions, lenders are continuing to do all they can to support customers during this challenging period.
“If customers are experiencing payment difficulties we urge them to contact their lender as soon as possible.”
FCA wants second charge lenders to consider zero interest rates for struggling borrowers
And the FCA warned the industry not to limit itself to a narrow range of forbearance options.
The regulator emphasised the potential risks for second charge borrowers in a dedicated section of its proposed guidance on the extension of payment deferrals.
It highlighted that firms in this sector should be mindful as there was a particular risk of harm from the total debt escalating significantly when a customer defers payments or enters payment shortfall, particularly compared to what they would otherwise have paid.
“Where normal payments are significantly disrupted for a material period of time this can mean customers struggle to repay the total amount owed,” it said.
“This is driven by the combination of relatively high interest rates adopted by some firms in this market, and that where interest is charged on sums in arrears, it is typically applied on a compound basis.”
Unlimited forbearance options
As a result, the FCA said it was particularly important firms considered using a range of forbearance options and not limit option to only those listed in the Mortgage Conduct of Business sourcebook.
“These could include applying simple interest rather than compound to any payment shortfall, or reducing the interest rate charged on these sums, in some cases to 0 per cent,” the FCA continued.
“This, when combined with sustainable arrangements to pay, may prevent the balance from escalating to a point where the customer is unlikely to be able to repay the total amount owed, and give borrowers more scope to effectively address any shortfall.”
The regulator added that customers who have benefitted from payment deferrals will be at particular risk of harm, as the deferrals will have disrupted payments under their mortgage.
And they may also have taken payment deferrals for their first charge mortgage which could have worsened their indebtedness.
The consultation on the draft guidance is open until 10am on Thursday 5 November.
Blueberry Mortgages steps into specialist packaging market
The brokerage will focus on bridging and second charge mortgages and already has a panel of 24 lenders including Precise Mortgages, MT Finance, Paragon and Shawbrook Bank.
To handle its specialist lending duties, the firm has set up a workforce headed by specialist lending consultant Alex Hamilton.
Hamilton said: “The biggest concern for brokers when using a packager is communication and an equitable fee charging structure.
“I want brokers to feel confident that when they refer their clients to Blueberry, they will get a fantastic service as well as a customer centric fee structure. Blueberry will always fully review a client’s circumstances to ensure they get the best possible advice.”
Christopher Moyse, compliance and operations director of Blueberry, added: “Alex and his team have established a strong client focused proposition for specialist lending where a positive outcome for the client is at the forefront of their advice process.
“I have utmost respect and admiration for the role that Alex has played in launching Blueberry Specialist Lending.”
FCA to review second charge mortgage advice and customer fees
Advice offered by second charge mortgage brokers is to be reviewed, as the regulator assesses whether customers get a product that meets their needs.
The FCA said it will be considering if “customers have understood the product and have been treated fairly throughout the process”.
The watchdog will also examine whether fees and charges paid by the customer are excessive and how brokers describe them.
A sample of firms’ advice will be monitored, most likely in 2021, the FCA revealed in a ‘Dear CEO’ letter to mortgage intermediaries, which laid out the “key risks” advisers pose to consumers and the wider market.
The regulator has been keeping a close watch over the second charge sector since 2017, and a year ago confirmed to Specialist Lending Solutions that it was still investigating the second charge market for potentially targeting unaffordable borrowers.
The subject of fees for brokers and advisers in the sector has also come under close scrutiny during the period with some prominent firms calling for a cap to be introduced.
This latest move comes after the Mortgages Market Study by the regulator found the overall mortgage market is generally working well but there are “potential harms” and picked out a number of areas for focus.
Second charge and lifetime mortgages were highlighted as areas of focus for supervision work.
The industry watchdog said: “Second charge brokers generally serve customers who may be less able to access mortgages from their existing lender or the mainstream market.
“Many require second charge mortgages to raise funds for debt consolidation and/or home improvements.”
All the winners of the British Specialist Lending Awards 2020
As part of a unique online setting, winners were announced in 22 categories spanning the breadth of the industry.
Here they are, congratulations to everyone.
Rising Star – Distributor sponsored by Precise Mortgages
Kimberley Gates, Sirius Property Finance
Complex Buy-to-Let sponsored by Paragon
Abbie Gaul, Impact Specialist Finance
Commercial Finance sponsored by InterBay Commercial
Kim McGinley, Vibe Finance
Second Charge sponsored by West One Loans
Kieran Jenner, Positive Lending
Bridging and Short-Term Finance sponsored by Roma Finance
Phil Mabb, Bridge Development Property Finance
Complex Credit sponsored by Vida Homeloans
Michelle Leyland, Adverse Money
Rising Star – Product Provider sponsored by Vantage Finance
Mia House, HTB
Underwriter sponsored by Criteria Hub
Anthony Lomax, Aldermore
Business Development sponsored by Virtus Search
Stewart Green, Vida Homeloans
Head of Sales sponsored by 3mc
Jamie Pritchard, Precise Mortgages
Head of National Accounts sponsored by Uinsure
Liza Campion, Precise Mortgages
Specialist Distribution sponsored by Saffron for Intermediaries
Stephanie Charman, Sesame Bankhall Group
Surveyor sponsored by Mortgage Brain
Joe Arnold, Arnold & Baldwin
Conveyancer sponsored by Rostrum
Peter Joseph, The Moving Hub
Bridging Lender sponsored by Specialist Lending Solutions
Scott Marshall, Roma Finance
Commercial Finance Lender sponsored by Connect for Intermediaries
Mark Parrett, InterBay Commercial
Complex Buy-to-Let Lender sponsored by TBMC
Adrian Moloney, OneSavings Bank
Second Charge Lender sponsored by Brightstar Financial
Buster Tolfree, United Trust Bank
Complex Credit Lender sponsored by One Mortgage System
Louisa Sedgwick, Vida Homeloans
Administrator sponsored by Pepper Money
Fran Bradshaw, The Buy to Let Broker
Development & Innovation Advocate sponsored by The Mortgage Lender
Ying Tan, Dynamo
Outstanding Contribution sponsored by Zephyr Homeloans