Second charge mortgages
In 2022, approximately 67% of second charge mortgages brokered incurred fees amounting to £2,000 or more, as revealed by data from the regulatory authority. This marks a continued upward trend since 2019, rising from 59% to 63% in 2020 and reaching 62% in 2021, indicating a consistent climb in associated costs.
A Freedom of Information request submitted to the Financial Conduct Authority (FCA) by Mortgage Solutions brought forth these findings. Interestingly, the percentage of brokers charging no advice fee experienced a decline from nearly 8% in 2021 to 5.23% in 2022.
Further analysis indicates a contraction in the category of brokers charging up to £1,000, dropping from about 9% in 2019 to the current 5.41%. On the other hand, the group charging between £1,000 and £2,000 has seen a gradual decline from 26% in 2019 to 24% in 2021, settling around 23% in 2022. This data suggests a shifting landscape in mortgage fees and highlights the evolving dynamics within this financial sector.
Regulatory transformation in second charge mortgages
The scrutiny of the second charge mortgages sector by regulatory authorities has been ongoing, with the Financial Conduct Authority (FCA) incorporating it into their mortgage regulations in 2016.
A pivotal moment occurred in 2018 when the regulatory body, through a formal communication to CEOs, highlighted the discovery of “significant issues” within the second charge lending market. Firms were sternly advised to reassess and enhance their operational procedures in response to these findings. 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
Liz Syms, CEO of Connect for Intermediaries, highlighted that historically, fees charged by brokers for second mortgages have been elevated compared to mainstream mortgages. This is attributed to the unique nature of these financial products and the distinct processing demands they entail.
Syms further elucidated that second charge mortgages involve a set of requirements that go beyond the standard criteria 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 in their handling, making them more intricate than conventional mortgages.
“These requirements include obtaining the credit report, checking with the existing lender that a second charge is acceptable and obtaining written consent, obtaining statements from the current mortgage company and any other credit companies if that debt is being consolidated, obtaining a desktop valuation and knowing when a full valuation needs to be done and instructing this, checking land registry for restrictions or covenants and so on,” Syms added.
She continued that other obligations included setting up accounts with credit agencies and valuation providers and incurring 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. Hence an adviser will usually turn to master brokers who specialise in this sector, and the work this firm does will need to be included in the fee charged to the client,” Syms said.
She said it’s important we don’t 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 lending criteria getting tighter 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 in the range of £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 lead to a significant increase in 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 the majority of these costs while still 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 simply 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 actual work involved. He questions the allocation of tasks between experienced advisers and administrative staff, highlighting that much of the work in second charge mortgages is handled by clerical personnel 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 have a clear understanding of 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 attempt to rationalise their fees based on acquisition costs and the extensive work involved in managing the administrative aspects of the process.
As facilitators of the lender’s tasks, these brokers handle a significant amount of work, including legal processes and packaging, with some even boasting in-house underwriters at their premises. Sinclair raised a concern about how regulators would perceive these fees in comparison to those associated with other products and relative costs.
The challenge lies in how fees operate within the same building but not under the same legal entity, creating uncertainty about acceptable fee levels. Despite the anticipation that fees for second charge mortgages would align more with mainstream adoption, Robert Sinclair highlighted an ongoing tension in the dialogue between first charge firms and those recommending second charges.
While there has been some fee adjustment with the increased popularity of second charge mortgages, there remains a considerable gap. Sinclair believes that the implementation of Consumer Duty could be a catalyst for better alignment in fees.
Looking ahead, Sinclair expressed curiosity about the figures for the upcoming years, expressing hope that fees would decrease. He finds it challenging to reconcile the substantial price differentials, considering his knowledge of the industry’s operations.
Some second charge brokers will need to ‘alter their approach’
Certain second charge brokers may find it necessary to “alter their approach,” according to McGonigle. He asserted that the implementation of Consumer Duty would undoubtedly prompt regulatory scrutiny of fee structures. The regulator is expected to assess fee dates and engage with key industry players to evaluate the cost of services to consumers.
McGonigle emphasised the likelihood of some brokers needing to adapt their business models in response to Consumer Duty. As a firm, he highlighted their long-standing advocacy for reduced fees and expressed confidence in the market’s capacity to respond positively.
In his observations, McGonigle expressed concern that a few dominant market players were influencing data, leading to potentially inflated fees. He suggested that the market dynamics were not solely driven by intermediaries, and emphasised the need for a broader perspective.
Nicholas Mendes, the mortgage technical manager at John Charcol, concurred that Consumer Duty would necessitate a thorough reassessment of fee structures by second charge brokers. He anticipated that the FCA would scrutinise charges among firms of similar size, emphasising the importance of justifying fees under the banner of fair value.
Mendes acknowledged the potential for differences in fees between first and second charge options but cautioned against excessive charging. He warned that insisting on parity with first charge options could lead to scarcity in second charge options through brokers, attributing this to profitability concerns.
In summary, Mendes stressed the importance of maintaining well-justified fair value assessments, ready for inspection by the FCA. He argued that this approach would align with the regulator’s strategic objectives and foster healthy competition in the market.
Credit to Mortgage Solutions
We’ve come to the end of our post on “Second Charge Mortgages.” Until next time, stay Connect!