Second mortgages should be part of every broker’s toolkit
Second mortgages should be part of every broker’s toolkit. The introduction of the Mortgage Credit Directive in 2016 essentially dictated that all brokers should consider a second mortgage alongside a mortgage in any capital raising situation. However, while the new regime has been embraced by some, there are still many who are not considering a second charge at all. There are a number of possible reasons why these brokers do not feel comfortable giving second load advice, but the main explanation is that they feel they do not know enough about second load and that there is therefore a real need for the intermediary. sector for better education about them.
It is also important to understand that brokers will rarely receive a request to arrange a second charge; however, they will frequently be asked how they might raise capital. This is where a second mortgage could be a viable and better customer outcome depending on the current and future needs of the customer.
The mortgage market is in a very different place than it was 12 months ago. At the time, the Bank Rate was 0.1%, whereas it is now 3.0%, a situation that would have seemed fanciful a year ago. At that time, Covid was still at the forefront of everyone’s minds. Now, while many borrowers (especially the self-employed) are still feeling the aftermath of the pandemic, they are also having to deal with the cost of living crisis. In the UK, this was fueled by rising fuel prices, the war in Ukraine and rising inflation (itself partly exacerbated by Brexit).
As a result, the ability to find a mortgage from high street lenders has been significantly reduced for many borrowers.
The fate of the independents
The self-employed have been particularly affected by the pandemic and the cost of living crisis. According to a study by the Center for Economic Performance (CEP) at the London School of Economics and Political Science, self-employed incomes and profits are worse today than a year ago.
The report “Covid-19 and the Self-Employed: A Two-Year Update” surveyed 1,500 people, a cross-section of the self-employed population, found that the current cost-of-living crisis is exacerbating the challenges for the self-employed, whose incomes and profits have not fully recovered from the pandemic shock.
A third of self-employed workers reported difficulty meeting basic expenses – the same proportion as in August 2020. Within this, more than two-thirds (67%) of healthcare support workers reported difficulty about four times more than those working in education (17%).
The impact of Covid-19 restrictions has receded, but the recovery has stalled in the face of high energy and raw material costs. These contribute to the financial difficulties of the self-employed, especially small businesses. Over 40% of the self-employed surveyed had monthly incomes of less than £1,000 in April 2022, up from 27% at that income level before Covid-19. Unsurprisingly, a third of respondents said the cost of energy was their most difficult issue.
The difficult conditions the self-employed have faced due to Covid have proven too much for many; in fact, the report finds that around 800,000 workers left self-employment during the pandemic. Despite the economy picking up after the final lockdown, the number of people going into self-employment remains relatively low.
The report adds that the condition of the self-employed is already precarious and that any new major challenges could push many of them to the brink of serious financial difficulties.
Rising energy bills put people under significant financial pressure. According to the StepChange charity’s own customer data, there has been an increase in the proportion of overdue customers with bills for dual fuel (56%), electricity (31%) and gas (26%) in September compared to August 2022.
In addition, individual failures have worsened. One in 405 adults (at a rate of 24.7 per 10,000 adults) entered bankruptcy between October 1, 2021 and September 30, 2022, according to official figures from the Insolvency Service. This is up from 24.0 per 10,000 adults who entered insolvency in the 12 months ending September 30, 2021.
Difficulties in raising capital
More and more broker clients are looking to raise capital, but are faced with the realization that a mortgage is harder to place, impossible to place or not at the right time; however, the need to raise capital remains.
The following may apply to customers:
• Are self-employed, whose product has been blocked due to a new fixed rate
• Have a bad credit rating
• Have had credit problems in the last three years
• Have a high level of unsecured debt
• Have complex revenue streams
• Are below earnings multiples
• Have recently changed jobs
• Be self-employed for more than 12 months but less than two years
• Having a property with non-standard construction
• Are in a debt management plan
• Are in an IVA
• Having taken out personal loans recently.
This is where the specialty market can help. Right from the start, brokers should focus on the right customer journey and managing expectations rather than the rate. Borrowers should understand that rates today are very different from those at the start of the year and that losing a prime first mortgage rate could be very costly.
Instead, brokers should focus on the value associated with the bottom line. By using criteria search systems, the broker can find a solution to the borrower’s situation, and then by researching these lenders on traditional platforms, he can understand what rates are available.
Knowing when to look for alternatives to expensive or unavailable first load options and controlling how to source is the first step; placement is as follows. Options go directly to the lender or through a specialist distributor; which one is better will be the decision of each company. The key is to do something, because the client still has that capital raising requirement that they need to solve – better to do it with you than with someone else.
The second fee provides a short-term solution to help the borrower meet their immediate needs. They can finally refinance on the high street when the time is right. This could be, for example, when they have the required work history or have consolidated their unsecured debts. Alternatively, when their credit blips have been cleared, the credit score has in turn increased, so refinancing options will have become available.
It is worth remembering that whatever circumstances might make Main Street a less welcoming place for first mortgages, as mortgage rates continue to rise, those looking to raise capital, whether this either for home renovations, debt consolidation or a combination of the two (for example) should have an unsecured loan and a second mortgage explored alongside a mortgage.
Education and awareness is needed throughout the market as the stigma of second charges from 15-20 years ago still persists today despite the very different market reality: things have changed drastically since then, as is the regulatory environment. Second-charge lenders are doing their best to improve broker education, but there is still work to be done. The reality of today’s mortgage market means that brokers who are unaware of second charges could really be letting their clients down at a time when they need specialist mortgage advice more than ever.