Loan Introducer The latest from the second-charge market

Expected growth in the secured lending market

Tony Marshall

CEO, Equifinance

Here we are in the middle of yet another monetary crisis, this time partially sponsored and created by our very own government. That is not meant to be a political statement, just a factual one – and, to be fair, it ignores wider international issues.

At some stage you would have thought that the advisers to the thenprime minister and chancellor might have shouted louder regarding the negative effect that the mini budget could have on the markets and, thereafter, consumers – consumers who are already suffering from runaway inflation and increased interest rates, and therefore increased mortgage payments, or at the very least a reduction in products available to service their needs. We should be thankful that Ms Truss and Mr Kwarteng did not make it to a full budget!

Anyway, what might this mean to the second-charge mortgage market (assuming we ignore the effects of increased borrowing costs for lenders)? Well, if we assume markets and funding supply return to some form of normality, the opinion here is that the outcome might lead to the golden age of secondcharge lending.

Let’s think about that. Our average loan size is c. £40,000. Our products provide solutions to many consumer needs, but primarily that of restructuring consumer debt to a usually lower-cost product. This means a reduction in monthly debt commitments, which in turn frees up disposable income and enables customers to honour their other essential commitments.

“Restructuring consumer debt” is an interesting phrase compared to the historical term “consolidation,” which in some quarters is considered a dirty word. Let’s consider this for a moment. Don’t nations, governments, and companies large and small sometimes restructure their debts for the greater good and for long-term financial gain – or, in some cases, survival? Of course they do. So why shouldn’t a consumer do likewise?

Of course, there are alternatives to secured loans for this need: remortgages, unsecured loans, debt management plans, IVA, bankruptcy, or just burying one’s head in the sand! I shall ignore the last one, and for the purpose of this exercise will not comment on debt solutions and bankruptcy, given that these create longer-term issues that are not just financial. Definitely not for Christmas, these!

So, here we are – two alternative lending solutions to solve customers’ problems. Once, their monthly commitments were affordable, but have become stretched now that their other essential outgoings have increased by at least one-third due to inflation.

The unsecured solution is an honourable method. However, most consumers do not have access to the kind of products with features that would assist in this regard. Typically, the term offered would not provide an adequate solution, nor do most unsecured suppliers offer loans of an adequate size.

A remortgage in a low-rate environment is potentially one of the best solutions; however, we are in different territory now. Most of our customers’ existing first-charge mortgages are fixed, mostly for a few years, and at incredibly low rates given where we have come from. This presents a dilemma. To consolidate unsecured debt of £40k, a customer would need to restructure not just their unsecured debt but also the larger first-charge debt. The outcome leads to restructuring a large mortgage from a low rate to rates that are currently double or triple their former rates, along with the early replayment charges (ERCs) built into the first-charge.

It’s fair to say that, in a lot of cases, it’s wise to leave the first-charge undisturbed and consider alternatives. This is where a second-charge comes into its own; the extra portion of borrowing might be best dealt with in isolation from the first, and not just because of ERCs, which have historically been the argument for considering a secondcharge as an alternative.

A second-charge loan is a viable form of borrowing for the consumer, whatever the need, and should be a part of the holistic review of a customer’s needs. This is probably truer now than it has ever been. M I

Debt conversations needn’t be awkward with open banking

Matt Meecham

chief digital officer, Evolution Money

Debt, even for borrowers with very little, can be an uncomfortable topic of discussion.

The perceived stigma around debt means some borrowers are reluctant to reveal the true extent of their loan or credit card borrowing, not only to friends and family but also their own mortgage adviser.

Either due to embarrassment or for fear it may harm their mortgage application prospects, not all borrowers feel at ease disclosing their debt. Yet as the cost-of-living crisis continues, advisers are increasingly likely to encounter clients who find themselves in some form of unsecured debt.

The latest Money and Credit report from the Bank of England shows a colossal £0.7bn was borrowed on credit cards and other forms of consumer credit in September alone.

Open banking can help ease the process of disclosing debt for clients and advisers, however, and eliminate some of the awkwardness for those borrowers who may be hesitant to discuss it. Through open banking, lenders and advisers can gain access to all of a borrower’s financial commitments, seeing exactly what and how much they are repaying each month.

As mortgage rates and bills rise, a borrower’s ability to meet first- or second-charge mortgage payments will increasingly be analysed. This makes it crucial that lenders and advisers have a clear and accurate financial profile of borrowers as early in the application process as possible.

A technology-led approach can better identify not only a borrower’s existing debt, but also ways in which a lender or adviser can best help. While it may not always be immediately obvious to clients, disclosing all of their debts in full will prove beneficial in the long run – and, instead of closing doors to them, it may actually do the opposite.

Open banking not only identifies a borrower’s debt but also their repayment history, which could potentially show them in a better light when compared to a traditional credit score and affordability assessment. The more insight advisers and lenders have into a client’s finances, the more we can help.

Clients looking to remortgage with their first-charge lender, for instance, and seeking to raise additional funds for home improvements, may find that due to their additional credit commitments, “computer says no.” Through open banking and a thorough examination of their finances, we may find a secondcharge is a viable option, either for debt consolidation purposes or by means of a home improvement loan – or both.

Consolidating debt may make it more affordable and manageable by reducing it to one payment to just one provider, as opposed to several.

The changing economic landscape means we are likely to see a greater reliance on specialist finance options to help borrowers who find themselves in temporary financial trouble.

A recent report from the Money Advice Trust found that, as of August 2022, a fifth of UK adults – 21 per cent – were behind on one or more household bills, a figure that has already grown from 15 per cent in March 2022 and is likely to increase further still.

Its findings also showed five per cent of UK adults were currently behind on their mortgage, up from two per cent in March – the equivalent of 2.5 million mortgage borrowers in arrears. Plus, the study shows the self-employed are disproportionately affected by the cost-of-living crisis, compounded by the fact many will face rising costs not just in their personal finances, but their businesses, too.

Advice and making sure such borrowers are on the most competitive products is going to be vital in future – something that can be helped by the full insight into borrowers’ finances that open banking provides. While not all borrowers will benefit from the financial solutions available, for some, acting sooner rather than later and consolidating debt could help lessen any further damage.

The market is likely to see a pattern of rising unsecured arrears before these trickle through into mortgage arrears. Even in times of financial strain, borrowers are likely to prioritise larger payments such as their mortgages.

Open banking can help identify and pinpoint borrowers in the first stages of arrears who may not be aware they have options open to them and may not be forthcoming about their financial worries.

Technology and lenders who use open banking, such as Evolution, are going to be at the forefront of offering bespoke lending solutions to the growing number of borrowers who find themselves in a less-than-perfect financial position.

Open banking leaves no stone unturned when it comes to borrowers’ debt, leading to more informed and accurate lending decisions – something that borrowers need more than ever right now. M I

References: Money and Credit - September 2022 | Bank of England Impossible_choices_Cost_of_Living_ briefing_Money_Advice_Trust.pdf (moneyadvicetrust.org)