Volume of 2nd Charge Loans Surges on Regulatory Fears
Beginning in 2016, mortgage brokers in the UK will be required to comply with a series of new regulations that guarantee they will be whole of market. The regulations are part of the European Mortgage Credit Directive to be effective from 21 March 2016. Experts say that fears surrounding the regulations have led to a definite surge in second charge loans since early summer.
The Financial Conduct Authority began warning mortgage brokers earlier this year about their obligations under the Directive. Those regulations bring the rest of the EU more in line with the UK while also adding a few additional regulations on top. Among the new rules are requirements for mortgage brokers to be whole of market or risk reclassification. What does this mean? It means that mortgage brokers will have to begin offering 2nd charge mortgages in addition to their 1st charge counterparts, or they risk being reclassified as restricted advisers.
Being subject to such a reclassification would certainly hurt a mortgage broker's opportunity to offer new products. It might also reduce opportunities to expand a business due to potential clients preferring to work with unrestricted advisors. This is certainly something that mortgage brokers want to avoid at all costs. As a result, more are starting to offer opportunities for 2nd charge loans.
2nd Charge Loans by the Numbers
Experts say the total volume of secured lending has steadily increased nearly every month since 2013. Secured lending includes both 1st and 2nd charge loans on houses. As for the latter specifically, total volume now stands at about Â£900 million in current lending. It is expected to exceed the Â£1 billion mark at some point in the first quarter of 2016.
The monthly volume of 2nd charge loans increased from 6% in August, followed by an additional 3% in September. The increases are attributed to mortgage brokers just now beginning to introduce new offerings in order to be in compliance well before the March 2016 deadline. It is also believed that brokers are finally coming to the realisation that 2nd charge loans are a viable financing option they should be pushing more aggressively among clients.
More Financing Good for Consumers
The European Mortgage Credit Directive is an example of how good things can happen when the right kind of government influence is applied. Requiring mortgage brokers to be whole of market or face reclassification is a good thing for consumers in that it makes more financing available across the board. When financing options increase, consumers tend to get better deals on rates, terms, and conditions.
We believe a larger volume of financing options should result in more 2nd charge loans among UK homeowners. How will the money be used? That's anyone's guess, but at the top of the list are probably home improvements and debt consolidation.
Home improvements are a very popular target for 2nd charge money because the secured loans providing the funding allow homeowners to borrow the tens of thousands of pounds necessary for most renovation projects. A consumer would go broke trying to finance major home improvements on credit cards, but 2nd charge loans are another matter.
As for debt consolidation, secured loan products almost always have better rates and terms as compared to unsecured credit. That means that 2nd charge loans are excellent tools for consolidating high-interest debt into a single instrument with a lower rate and a finite payoff period.
We believe it is a good thing that more 2nd charge loans are now available in the marketplace. Consumers will definitely benefit as a result.
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