The death of Stephen Hawking came as a surprise like it does with deaths of any celebrity whom we consider to have had an influence on our lives. Here was a man who overcame stupendous physical difficulties and became probably the most important and visible scientist of the age. To me, his gift to mankind, apart from his contribution to science, was in demystifying the hugely complex universe and making it almost understandable to a non-specialist audience. They don’t come much more non-specialist than me!
Back on Planet Earth, far from black holes and string theory, my colleagues and I are busy trying to make the second charge mortgage and it’s uses more understandable and accessible to the adviser community. Hardly in the same league as Professor Hawking and quantum mechanics, but the principles are the same. However, we are trying to cut through the misunderstandings and preconceptions surrounding the subject and making it easier to understand in terms of where it can be used and that is why I like to think we can claim a little kinship with the great man!
I often start my second charge presentations by using the phrase – ‘this isn’t rocket science’. To my way of thinking second charge borrowing has been allowed to become a kind of bogeyman to a lot of advisers. Even though first and second charge mortgages have shared the same regulator for a while now, and the regulator has made it clear that it wants advisers to embrace second charge borrowing as a legitimate alternative to the options available, there is still a reluctance to engage.
To my mind there are several reasons for this.
Sourcing – unlike first charge mortgages and the ever present sourcing engines, even though there are systems catering for secured loans, advisers are finding that when they try to source this way, the subtleties behind the criteria mean that many advisers are put off when they deal directly with lenders.
Process – advisers tend to find the post enquiry process confusing
Pricing – advisers believe that second charge mortgages are more expensive
Fees – advisers are uncertain whether fee structures are client friendly
Let’s just look at each in turn.
Accurate sourcing is key to any advice process. I take the view that busy advisers rarely have the time to look at a whole of market scenario for second charge and while systems exist that will offer initial guidance, it is rare that full criteria are available to ensure that the final choice of advice is the correct one or whether it will actually go through. That is why I recommend that advisers look to specialists like Fluent for Advisers with their enquiries. A whole of market approach with 24/7 feedback makes sure customers are properly advised and that the final recommendation is compliant and in the client’s best interests. Not only that, but it frees up the broker to concentrate on his or her core business.
The process can seem difficult to understand. Document packs going to customers followed by cooling off periods with no client contact (unless the client waives and opts out) and in Fluent’s case no upfront fees to pay, seem a world away from the typical first charge experience. However, once you get used to it, the process lets people think about what they are taking on before committing and personally I think it is better for the customer. We only have to look at how low the repossession rate (0.06% as a percentage of average outstanding agreements in 2017) to see how customer orientated second charge actually is.
Pricing on second charge loans takes into account that they sit behind (in most cases) a first charge mortgage, which has precedence in the event of foreclosure. That being said, today’s rates can be as low as 4% – hardly a rate hike!
Fees in the second charge market have become a bone of contention over recent times. It is worth remembering that in most cases the costs associated with valuation and legal activity are often borne either by the master broker (as in Fluent’s case) or directly by the lender. What you might not know is that when cases are turned down by lenders, the cost of the valuation and legal fees are still borne by the master broker.
As far as the client is concerned, there is no upfront cost at all, even in the event of a failure.
It has been uplifting to see the affection in which Professor Hawking was held for his work in demystifying science. I will just be happy when second charge mortgages are universally accepted as a strong alternative source of funding for capital raising.
Jeff Davidson is head of intermediaries for Fluent for Advisers