Second charge mortgages
Data from the regulatory authority revealed that in 2022, about 67% of second-charge mortgages brokered incurred fees of £2,000 or more. This marks a continued upward trend since 2019. It rose from 59% to 63% in 2020 and reached 62% in 2021. This indicates a consistent climb in associated costs.
A Freedom of Information request submitted to the Financial Conduct Authority (FCA) by Mortgage Solutions revealed these findings. Interestingly, the percentage of brokers charging no advice fee declined from nearly 8% in 2021 to 5.23% in 2022.
Further analysis shows a decrease in brokers charging up to £1,000. This dropped from about 9% in 2019 to 5.41% now. Meanwhile, those charging £1,000 to £2,000 have also decreased.
They went from 26% in 2019 to 24% in 2021 and 23% in 2022. This data points to changing mortgage fees and evolving financial dynamics.
Regulatory transformation in second charge mortgages
In 2018, a pivotal moment occurred when the regulatory body communicated formally to CEOs. They highlighted discovering “significant issues” within the second charge lending market. Consequently, firms were sternly advised to reassess and enhance their operational procedures.
This regulatory step change has brought about a new era of compliance and vigilance in the industry.
First and second charge mortgages fee structures incomparable
Syms explained that second-charge mortgages involve requirements beyond those for a first-charge mortgage. This specialised nature contributes to the higher fees associated with brokering these transactions.
In essence, the intricacies of second-charge mortgages necessitate a distinct approach, making them more complex than conventional mortgages.
“These requirements include obtaining the credit report, checking with the existing lender for second charge acceptability, and obtaining written consent. If the debt is consolidated, brokers must get statements from the current mortgage company and other credit companies.
They also need to obtain a desktop valuation and know when a full valuation is necessary. This involves instructing and checking the land registry for restrictions or covenants,” Syms added.
She continued that other obligations include setting up accounts with credit agencies and valuation providers. There is a cost for every search, which must be completed before a lender reviews the application.
“The adviser effectively becomes the initial underwriter, and not all advisers have the skills, knowledge, or systems to complete this work. Therefore, an adviser usually turns to master brokers specialising in this sector. The work done by this firm needs to be included in the fee charged to the client,” Syms said.
She said it’s important not to compare the fees on first- and second-charge mortgages as the “skills, process, knowledge and amount of work required are completely different.”
Nicholas Mendes, mortgage technical manager at John Charcol, agreed that the approval processes were more manual with second charge, adding that less technology was used to automate parts of the approval side.
He added that growing fees could also be attributed to higher demand and tighter lending criteria due to rising rates and squeezed affordability.
Operational expenses on the rise for second charge mortgages
According to Positive Lending’s CEO, Paul McGonigle, the prevailing narrative suggests that two-thirds of borrowers are paying £2,000 or more. However, he clarified that his firm’s experience paints a different picture, with the average fee falling from £1,000-1,249.
McGonigle emphasised that larger fee-charging firms like his cover the client’s mortgage survey and reference request costs and absorb losses from down-valuations without passing the burden to the client.
Taking a pragmatic stance, he expressed that if mortgage brokers adopted a similar approach, it could significantly increase average mortgage fees.
Acknowledging the increased complexity and expenses associated with second-charge mortgages, McGonigle highlighted an 11% rise in operational costs for this product line. Despite this, he affirmed that Positive Lending has shouldered most of these costs while maintaining a profitable business.
The FCA will inquire about the primary beneficiary of the deal
The FCA is set to examine who stands to gain the most from a deal, questioning whether it’s the broker or the customer. According to Robert Sinclair, CEO of the Association of Mortgage
Intermediaries, the customer might not benefit significantly from the arrangement, especially if they’re borrowing existing funds and adding broker fees. This practice could obscure larger fees, potentially reaching a substantial amount like £3,000 or more.
Sinclair emphasises the need to address transparency issues in the sector. He points out that justifying the value and fees requires scrutiny of the work involved.
He questions the allocation of tasks between experienced advisers and administrative staff, highlighting that clerical personnel handle much of the work in second-charge mortgages, dealing with legal documentation and settling existing debts.
In addition, Sinclair raises concerns about the concentration of business within a few key players in the sector. He suggests that this concentration allows the regulator to understand the landscape, prompting further examination into the practices and justifications for fees within these select entities.
Consumer Duty | The driving Force behind fee Alignment
According to Robert Sinclair, brokers dealing with second-charge mortgages often rationalise their fees based on acquisition costs and administrative work.
These brokers, as facilitators, manage significant tasks, including legal processes and packaging. Some even have in-house underwriters. Sinclair raised concerns about how regulators perceive these fees compared to other products and relative costs.
The challenge is that fees operate within the same building but not under the same legal entity, creating uncertainty about acceptable levels. Despite the anticipation that fees for second-charge mortgages would align with mainstream adoption, Sinclair highlighted ongoing tension between first-charge firms and those recommending second charges.
Some fee adjustments have been made due to the increased popularity of second-charge mortgages. However, a considerable gap remains. Sinclair believes implementing Consumer Duty could catalyze better fee alignment.
Looking ahead, Sinclair expressed curiosity about future figures and hoped fees would decrease. Given his industry knowledge, reconciling the substantial price differentials is challenging for him.
Some second charge brokers will need to ‘alter their approach’
McGonigle emphasised that some brokers might need to adapt their business models in response to Consumer Duty. He highlighted their long-standing advocacy for reduced fees and expressed confidence in the market’s positive response.
He expressed concern that a few dominant market players were influencing data, leading to potentially inflated fees. He suggested that intermediaries did not solely drive market dynamics, emphasising the need for a broader perspective.
Nicholas Mendes, the mortgage technical manager at John Charcol, agreed that Consumer Duty would necessitate a reassessment of fee structures by second-charge brokers. He anticipated that the FCA would scrutinise charges among firms of similar size. Mendes stressed the importance of justifying fees under the banner of fair value.
Mendes acknowledged potential fee differences between first and second charge options but cautioned against excessive charging. He warned that insisting on parity with first charge options could lead to a scarcity of second charge options through brokers. He attributed this to profitability concerns.
Mendes stressed the importance of maintaining well-justified fair value assessments for FCA inspection. He argued that this approach would align with the regulator’s strategic objectives and foster healthy market competition.
Credit to Mortgage Solutions
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