Date published: 21 January 2008
Many brokers will look at new income streams in 2008, and both secured and unsecured loans can be considered alongside remortgaging. Chris Bennett runs through the options
One thing is certain about the year ahead – it will be uncharted territory for the majority of participants in the consumer finance and mortgage markets. In the last months of 2007, we saw the arrival of the liquidity crisis in the UK.
While we have to go back more than 15 years to the property crash of the early 1990s to find the last great challenge our industry faced, in the last five months of 2007 we saw the start of the present crisis – an event that saw lenders in the UK compete to restrict criteria and ensure they were not left counting the cost of the excesses of the past few years. And to cap it all, the last few weeks of the old year saw the national media talk about the possibility of a retail recession and continuing falls in the level of UK house prices.
While there will be some whose time in the industry stretches back to the early nineties, few members of the senior management teams of either lenders or intermediaries will have any experience of the events we are currently seeing. Coping with this type of market turmoil continues to prove difficult, and while none of us have the benefit of a crystal ball, it seems likely that firms who prosper will be those that follow three simple rules:
Control of costs. Recent redundancies in our sector indicate that many firms became complacent in the boom years and are now looking to the future. This is likely to entail further staff reductions and an increase in the automation of processes.
Give clients the right product. Traditional mortgage products are no longer sufficient. Customers have very different lifestyles from those of even a decade ago and want to use their properties to fund these. A remortgage may not be 'best advice' for these clients, and intermediaries need to consider all options to ensure they attract, retain and satisfy a profitable client base.
Develop new income streams. Providing alternatives to a remortgage to ensure the client thinks of the intermediary for a variety of financial needs, allowing the development of a deeper, more lasting relationship. After all, an existing customer costs far less to manage than the generation of a new one.
Like any event, the current difficulties will bring opportunities for those prepared to find them. Easy credit has dominated the UK economy for a decade. 0% balance transfers, interest-free, 'buy now pay later' schemes and low rate personal loans have all fuelled consumer expenditure. As conditions tighten, such credit will still be available, but to a smaller percentage of the UK population.
This means that a growing percentage of many brokers' clients will need assistance to finance or refinance their expenditure in the coming months, particularly when household income continues to come under pressure thanks to food and fuel price rises, as well as Council Tax increases.
Checking the options
So what alternative products do they need to consider? There are a wide range of financial products out there even today, ranging from introducer-focused personal loans through to assistance with arranging debt management programmes, and individual voluntary arrangements (IVAs) for clients who have exhausted all other avenues.
It would be helpful to focus on two of these products, which are most closely aligned with the mortgage market, and likely to be the first port of call for any customer for whom a traditional remortgage may not be the best option – unsecured personal loans and
secured loans.
First, unsecured personal loans are made available to intermediaries via a number of lenders such as Citi, Black Horse and Halifax. Typically, loans are available from around £1,000 to £25,000 for a homeowner, with some lenders also providing facilities for tenants. Rates will vary according to perceived risk but APRs under 10% are possible for 'creditworthy' customers.
Secured loans are often talked about by mortgage packagers. With advances in excess of £6bn in 2006, the market is a significant one for the UK economy. With loans available for the majority of purposes, from overseas property purchase through to consolidation, it is also one that many of clients will be familiar with. While there are many similarities between a secured loan and a first-charge mortgage, there are also many differences, and traditionally secured loans have been offered largely through specialist finance brokers.
While the credit crunch has seen a withdrawal of a number of specialist players from the market and a general reduction in LTVs, the sector's criteria, particularly around income, will mean that a significant number of clients will find a secured loan the simplest and most effective route to obtain finance or refinance. APRs vary considerably, but can be as low as 7.9%.
Unsecured personal loans and secured loans should be seen as a medium-term facility for clients, rather than the long-term commitment of a first-charge mortgage. There are a number of reasons for this, not least that rates tend to be higher than a first-charge, reflecting the increased risk to the lender.
As would be expected, the majority of such loans are requested for debt consolidation – customers seeking to reduce monthly outgoings by taking a number of debts, such as credit cards and store cards, and obtaining a loan over a longer period, typically between five and 25 years. To ensure best advice, unsecured and secured facilities should be considered as an alternative to a remortgage in all circumstances, but typically where clients:
n are in a tie-in with their existing first-charge and would pay substantial penalties
n have undergone a change of circumstances since their existing first-charge mortgage was granted, so that a remortgage is likely to mean they will end up paying a higher rate than before – if this is the case it may make more sense to leave the mortgage in place and pay a slightly higher rate on any additional funds
n do not want to pay any upfront fees, such as for a valuation or solicitor. For both unsecured and secured loans, all fees are typically added to the loan
Clearly, there are also many other possibilities.
Consumer legislation
When considering these alternatives, it must be remembered that the loan products themselves are not currently governed by the FSA. Instead, loans are covered by the Consumer Credit Act (CCA), which sets out how they must be promoted, written, conducted and redeemed.
The last point is particularly important and means that any loan under the CCA's financial limit – currently £25,000 – will attract a maximum settlement penalty of two months' interest – significantly less than the penalties imposed on most first-charges upon redemption. From April 2008, this limit will be abolished, meaning that all unsecured and secured loans will attract this maximum penalty upon early settlement. This will increase this type of finance's attractiveness compared to a first-charge product.
So how do brokers ensure they offer their clients the best possible products? If a firm is not already offering secured and unsecured loans, it would be a good idea to consider starting, either directly or via a master packager or a broker that the firm can work with. If a broker firm is to outsource its secured loan business, it will need to ensure the company it uses treats the customer the way that it, as the initial firm, would want them to be treated, and that it works with the company to build volume. It would be wise to ensure formally that the client will remain the original firm's client.
If a company decides that it can handle writing this business in-house, it will need to be sure that it can generate the volume to justify the investment of time and effort, as well as building a panel that meets the customer's requirements. It would be sensible to look at joining one of the loan networks, who can give access to a wide range of lenders, support services and other financial products designed to create opportunity for brokers' businesses.
While we may be witnessing a new and different market from previous years, it is still important to make sure all bases and potential income streams are covered. If firms can seize some of the opportunities that still exist in this market, then 2008 promises to be not just an interesting year but also a profitable one. n
Chris Bennett is director of secured loan network UNIFi
Source:
http://www.mortgagesolutions-online.com/public/showPage.html?page=686525
