I gave a recent presentation at the FSE London event in Old Billingsgate and it was clear that the majority of first mortgage intermediaries in the audience were disenfranchised with second charges, as they just couldn’t bring themselves to recommend such a product with the large fees that accompany them.
I could sense that, if the second charge mortgage sector was going to develop and grow, then it must adapt. Someone has to take a lead, and there was a positive welcome for our own position – free advice and sourcing, and a fee of just £295 prior to packaging the application if the customer decides to proceed.
To balance the debate we need to set the record straight and explain why most master brokers still operate a model with, what to most intermediaries seem rather high fees. Unfortunately, it was necessary under Consumer Credit regulation, when master brokers were unable to retain more than £5 of any upfront fee on dropped cases. Master brokers had to cover all the costs until (hopefully) some deals completed and paid out. But seconds now fall within MCOB, creating the scope to try something different.
Another reason master brokers charge such fees is that they typically pay away half of the fee to the introducer. But of course the master broker retains the other half. Take an example where an intermediary introduces a client, the master broker charges say £5,000 as a fee and the intermediary earns £2,500 on a typical £50,000 second charge mortgage. The question here is: ‘Would the intermediary really expect to earn this much on an average-sized remortgage?’ Probably not. But for the intermediary to earn £2,500 it costs their client £5,000.
Master brokers will explain they charge the fees they do because they have to meet the labour costs on abortive business. Now, this is true but that’s the market we’re in, and the question should be asked: “Why do so many second charge mortgage cases abort before completion?” The simple truth is that, at some point during the loan process, reality tends to kick in and the customer balances the fee required to the size of the loan. It’s at this point they bail out – and because so many do bail, those who go ahead and take out a loan, end up covering the labour costs of other people’s work. It’s a vicious circle – but one we can end.
Master brokers also pick up the cost of the valuation but this doesn’t need to be the case. As mentioned, second charges now fall within MCOB and there’s absolutely no reason why the customer can’t be asked to meet their own valuation cost. But, as it happens, around half of our current case load benefit from a drive-by or desk-top valuation, and these are often free. The same goes for building society references – the master brokers sometimes pay for these too, but they are often free or not required. And if one is required, at a modest cost, why not instead ask the customer to pay?
Finally, the argument for high fees is that seconds are complex to sell and underwrite properly. And let’s not forget, those master brokers who struggle in this area, will almost certainly run up higher costs, and need to pass those costs onto the customer. Which probably leaves you wondering, how can master brokers justify these fees to their introducing intermediaries? And how can those introducers justify using these master brokers?
We believe in a much more efficient sales and application process, combined with a much smaller, simpler fee model, with valuation costs tailored to each application. Our view is that the second charge market will eventually move this way, but it could take years before all master brokers operate like this. A £295 fee is one which mortgage intermediaries should be able to relate to, and ‘sell’ to their clients. The customer pays for the valuation if one is needed, and we pay for building society references on the rare occasion they’re warranted.
In this new age, the truth about second charge mortgage master broker fees is now out. When it comes to seconds, all intermediaries have to ask themselves, “Can I recommend my client pay more than a £295 fee?” In this situation, it shouldn’t take you long to answer.
Steve Harness is commercial director of The Loans Engine