You taught your children their ABCs, but how much do you know about your APRCs? In a product area like second charge mortgages, the APRC (the annual rate which includes both fees and charges) is an important go-to figure, and gives all concerned a much clearer picture about what the client will genuinely pay.
So while much has been written recently about highly competitive second charge rates, for instance, we now have four lenders fighting it out with sub-4% deals, the lowest of which is 3.73%, we still need to look closely at the APRC.
Well, when it comes to APRC there’s even better news. With a low fee charged on the product, for example our application fee is £295, plus a typical valuation fee of £350 and average intermediary earnings of £750, a client can currently find 18 second charge deals available with an APRC of less than 5%. So, that means it now costs as little as £261 per month to borrow £50k over 25 years on a second charge.
However, (and correct me if I’m wrong), 25 years is the default term for a traditional first-charge mortgage, but not a second charge. Indeed, customers seem to really like the flexibility and choice presented by a second charge, and therefore a 25-year term is not necessarily the right one to use when looking at overall second charge costs.
We’ve looked at a sample of 6,300 second charge mortgages written since 2010 and the average term requested is just 10 years. This may not come as a surprise to advisers given that most customers prefer to pay secondary borrowing off more quickly than the main mortgage. But it’s important to make that adjustment, and therefore dropping the term to 10 years will increase the APRC slightly, as the fees are factored into the cost over a shorter term. That said, carrying out the same process, and using our fee level with a client looking to borrow £50k over 10 years, we’re still able to find 13 deals below 5% APRC.
But, beware; this won’t be the case for second charge mortgages through every master broker. Traditional, larger master broker fees, will have a considerable impact on the APRC. Unfortunately, there are still many master brokers who appear to be stuck in a time warp or a separate universe from the rest of us, and continue to charge clients of intermediaries a fee of £5,000 on a £50k second charge mortgage.
For example, I ran a quote for a £50k second charge mortgage over 10 years on the system of a well-known master broker. It charges a ‘Packager Fee’ of £4,995 which lifts the APRC to 6.3%. The same deal with a low fee-charging broker like ourselves, with an application fee of £295, valuation fee of £350 and intermediary earnings of £750, has an APRC of only 4.7%. So same lender, same loan, same deal but the £4,995 master broker fee adds more than 1.5% to the APRC.
The broker charging this £4,995 packager fee also has only 11 deals with an APRC below 10%, (and none below 5%), the lowest being 6.3%. Yet, for the same client, a low fee charger has 92 deals below 10% APRC, the lowest being 4.7%. Therefore, in this market it certainly pays for you, as an adviser, to be fully aware of the distorting impact, and the much higher costs for clients, that different master brokers’ fee-charging systems will have.
It’s an unfortunate fact, but understandable, that the second charge market has stalled slightly, and isn’t growing the way we had hoped in this post-MCD world. But I think we can see why. As long as intermediaries see some master brokers trying to charge their clients fees up to (and beyond) £5,000, these high fee-chargers will continue to taint the second charge product, in the eyes of intermediaries.
However, as shown above, there is an alternative. A rate of 3.73%, a fee of £295 and an APRC in the mid 4%’s – this is akin to a further advance in everything but name, and with underwriting flexibility thrown in. So, make sure you’re looking in the right places when it comes to second charges, and that you know your APRCs.
Steve Harness is commercial director of The Loans Engine