How New Lending Rules Mean Better Secured Refinance Loans!

Michelle Tuvey Michelle Tuvey | Loan Underwriter

Secured loan sales fell by some 14% this past August (2014), according to numbers from the Bank of England. Much of that loss can be attributed to the seasonal nature of second charge borrowing. Overall, though, the market remains strong. It should get even stronger thanks to new lending rules that look very good for secured refinance loans.

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Among the most important rule changes we have heard about since the financial crisis is the requirement for banks to be stricter in determining a borrower's ability to repay. The implementation of the Mortgage Market Review (MMR) in early 2014 requires lenders to scrutinise a customer's financial position closely, and borrowers to provide more paperwork proving they can afford a loan. However, two additional changes have not received as much attention. We will discuss them here.

Presenting All Borrowing Options

Prior to the financial crisis, the Office of Fair Trading regulated the second charge market. That regulation was transferred to the Financial Conduct Authority, with a gradual transition taking place through until 2016. However, any firm offering consumer credit products must adhere to the new Mortgage Credit Directive as of 1 April 2015.

Part of that directive is a requirement for lenders to ensure consumers are getting the best loan products for their individual circumstances. Lenders can no longer offer only the product that most benefits them. The best way to understand this is to consider a secured refinance loan as opposed to a remortgage. A lender may tell a consumer that the remortgage is the best financing option, but there is no way to know without presenting the secured loan alternative in all its details. The new rules require lenders to present all options on equal footing – even when the option they prefer is not the best option for the customer.

This will be good for secured loans inasmuch as these tend to be better products for refinancing high-interest debt. A secured loan enables a homeowner to leverage existing equity at very good rates and for manageable terms. Secured loan refinancing is superior to remortgaging in that it does not reset the clock on paying off one's property.

It has been suggested by some that the new rules are being ignored by a handful of lenders and brokers in the hopes that it will not be enforced until 2016. If so, those lenders and brokers are falling behind in an increasingly competitive market. As a consumer, you should make it a point to review all of your options for refinancing before you decide what is best for you.

Lender Creativity

Another consumer-friendly part of the Mortgage Credit Directive is the flexibility it offers lenders in terms of creating attractive loan products. Lenders are now allowed to be more creative in terms of fixed rates, associated charges, early repayment fees, etc. The greater flexibility allows them to create more customised secured loan options to meet specific market needs. This may be one of the reasons the number of secured loan products now available to consumers exceeds 220.

As a borrower, you can take advantage of this greater flexibility by comparing as many secured loan products as you can. Lenders who truly want your business will be willing to offer very good deals capable of helping you improve your own financial position. As a rule of thumb, you should compare at least three different loan products before choosing one. If you can include five or more, you will be that much better off.

Assess Your Financial Position

It is clear that the new lending rules being brought about by the Mortgage Credit Directive will be good for secured refinance loans. We expect the market to continue expanding as lenders compete for consumer business. As for the consumer, now is the time to begin assessing one's financial position in order to determine whether or not refinancing with a secured loan is a good idea.

We recommend you start by looking at your monthly and annual budgets. Sit down and figure out exactly how much money you are spending, what you are spending it on, and how you might be able to save some here and there. A budget is an indispensable tool for managing your finances. Without it, there is no way to know your true financial health.

With budget in hand, you should get a clear picture of how your outstanding debt is affecting your finances. Are you overextended by high-interest credit that could be consolidated into a single secured loan? Do you have things you would like to invest in but cannot because your monthly budget will not allow? There are many questions to ask once you have a budget in place.

If your financial position can be improved by refinancing existing debt with a secured loan, it makes good sense to go that route. You have equity in your home; you might as well use that equity as a financing tool to pay off the high-interest debt that is choking your budget.

Determining Your Borrowing Power

New lending rules for secured refinance loans require lenders to present every option to you. You can get a head start by determining your own borrowing power before you even begin to look at loans. You do this through two calculations.

The first calculation determines your current amount of equity. It is straightforward: subtract the total amount you still owe on your mortgage from the retail value of your home. You can contact your mortgage lender to find out how much you still owe. The resulting number is your equity.

The second calculation tells you how much you can borrow based on that equity. For this calculation, you will need to know the estimated loan-to-value (LTV) ratios from several lenders. LTVs are included in loan offers advertised by banks and building societies. This ratio, which is expressed as a percentage, tells you the maximum amount you can borrow compared to equity.

For example, let us say one lender you are considering offers a secured loan with an LTV of 75%. You would be able to borrow up to £75,000 on £100,000 in equity. An 80% LTV on that same amount would make it possible for you to borrow up to £80,000.

Knowing your borrowing power tells you whether it is practical for you to refinance existing debt with a secured loan. If your borrowing power is greater than the amount you owe on your other debts, a single secured loan might be your answer. If your existing debt exceeds your borrowing power, you may have to look for multiple secured refinance loans to cover it all. This all has to be considered in light of what your monthly budget will allow.

At the end the day it is all about improving your financial position. Refinance loans taken against the equity in your home offer you the opportunity to do just that. We invite you to take advantage of secured loans and the new lender rules that make this kind of financing more attractive to homeowners. We expect the second charge market to grow substantially in the years ahead; there is no reason you should not be part of it.

If you need advice with any aspect of refinance please call our team of friendly experts who are there to help. There is no charge for their expert advice and they can help you source the best deals to suit your individual circumstances in just a few minutes.

Our team will help you compare offers side by side and make sure you are aware of all the costs of each deal so there are no hidden surprises that will rear their ugly head later in the process. When you are happy with a specific lender offer our team will create and submit an optimised application on your behalf which will ensure that the lender reviews your case in the best possible light.

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