Loan Introducer The latest from the second- charge market

Second-charges can help pay for green home upgrades

Marie Grundy

SMP board member & MD, second charge mortgages, West One Loans

Iwant you to imagine for a second you’re a buy-to-let landlord with three small properties that you let out to young professionals.

Various tax changes in recent years mean those properties are not as profitable for you as they once were.

But that’s okay, because you only bought them to boost your pension in retirement, which is fast approaching, and you’ve made a decent profit due to house price appreciation.

Recently, though, you found out landlords will be forced to ensure their homes have an EPC of at least a C by as early as 2025 as part of the government’s net-zero plans.

The problem is, all three of yours are currently a D. Even worse, the government estimates that the cost of the upgrades will average £7,646 a property, meaning you’re facing a bill of nearly £23,000.

With retirement around the corner, you don’t have that sort of money lying around – so where do you turn next?

What I’ve just outlined above is a fictional scenario, but there will be thousands of landlords in this very position.

And they face a tough choice: sellup – probably below market price to cover the cost of the upgrades – use their savings, or tap into the equity they have in their portfolio.

For many landlords, I’d imagine the first port of call will be to remortgage. But there is potentially a better option – a second-charge mortgage. And I’ll explain why.

RETAIN THE RATE

One of the main reasons borrowers opt for a second-charge mortgage is that they are already on a competitive first-charge rate that they don’t want to disturb.

Given we have just exited a period of record-low interest rates, there will be a lot of landlords in this position.

However, buy-to-let mortgage rates have increased significantly over the past year, so landlords will almost certainly pay more than they had been if they remortgage.

By releasing cash through a secondcharge instead, landlords can protect their first-charge mortgage rate while avoiding the early repayment charges that many first-charge fixed rates carry.

And what’s more, many secondcharge providers will lend up to £250,000 these days, which should be more than enough to cover the required upgrades for most landlords.

QUALIFY FOR A DISCOUNTED GREEN FIRST-CHARGE MORTGAGE

A number of lenders have launched green buy-to-let first-charge mortgages to help improve the energy efficiency of the UK’s housing stock.

Many of these loans offer discounted rates to borrowers with properties that have an EPC rating of between A and C; landlords with less-efficient properties thus do not qualify.

While there are a few providers that offer green loans to borrowers who pledge to make their homes more efficient, these are only suitable for those who have the cash to make those improvements.

By releasing equity via a secondcharge, landlords can obtain the money they need to make home improvements and, as a bonus, should qualify for a discounted green first-charge deal farther down the line.

At a time when many of us are feeling the pinch due to the rapidly rising cost of living, I’m sure any discount – no matter how small – would be welcomed.

Use green seconds to upgrade the rest of the portfolio

While there are many lenders offering green firstcharge mortgages, there are currently just a handful offering green second-charge loans.

The ones that do exist tend to mirror those of their first-charge counterparts by offering a discounted rate to borrowers with properties that have an EPC of A to C.

If you have landlord clients who have a few properties with an EPC of A to C, they can borrow against those, using a green second-charge – and benefitting from the discounted rates they offer – to upgrade the properties that don’t meet that criterion. That discount will effectively make the upgrades cheaper.

Often, lenders also pledge to donate to green causes for every loan that completes. At West One, for example, we have pledged to offset one tonne of carbon for every 10 second-charge completions and to donate to sustainable overseas development projects.

FLEXIBLE AND COMPETITIVE

There are many misconceptions about second charges, one of the main ones being that they are expensive.

While second charges do carry slightly higher rates than first-charge loans, they are still highly competitive, with buy-to-let seconds around the six- to seven-per cent mark in plentiful supply.

Another major advantage of taking out a secondcharge is that the underwriting process is typically far less arduous than for a mainstream mortgage.

Some lenders don’t credit-score borrowers; instead, affordability is determined by taking into account rent received and the original first-charge.

It means, therefore, that application-to-offer times are usually measured in days rather than weeks.

Seconds can also be incredibly flexible, with terms available from three to 25 years in most cases, while interest-only options are also available.

THE UNTAPPED RESOURCE

The misconceptions surrounding second-charges mean many landlords are not aware of the benefits they offer.

However, for borrowers who need to access cash quickly at a competitive rate and who prize flexibility, they can be a great choice.

If your clients are worried about how they will pay to upgrade their homes to meet the government’s incoming legislation, then second-charge mortgages are worthy of consideration at the very least. M I

Consolidation needs to be treated with care

Tony Marshall

CEO, Equifinance

The second-charge sector is in demand! Brokers are finding the opportunity to go beyond remortgages and see our offering as something to recommend rather than ignore. Capital raising for debt consolidation and other domestic purposes has now been joined by borrowing for business needs, and although that is fairly restricted at present, it is bound to gain traction because of the implicit requirement for speedy resolution.

New-business figures are being pushed into new territory and demand is growing, so it could be argued that everything is rosy in the garden.

However, we are entering a period in which underwriting standards are going to be well and truly tested. Costof-living increases, fuelled in part by a steadily increasing inflation rate, are going to see lenders looking to balance a robust credit policy with the temptation to write strong volumes of new business from potential clients whose ability to repay new finance arrangements is likely to be compromised as wages fail to keep pace with increasing household costs.

Consolidation is going to be a fruitful source of new business, but only as long as affordability is not compromised. Reducing monthly outgoings via consolidation is a tried-and-tested method of helping customers to keep better control over their finances. However, with the added cost-ofliving pressures, there is now a stronger possibility that no matter how much consolidation is possible, the family budget might still not be able to cope. Advisers need to remain as neutral as possible and exercise caution when advising clients to enter any further borrowing in cases in which the budget is already under pressure. The acid test is whether, in this uncertain time, consolidation will actually help or hinder customers in the longer term. As a nation, we have not been in this situation for a long time – inflation and interest rates are rising, but now there is the added menace of energy costs that we cannot control. While fuel costs at the pumps have receded a little, the fact remains that, from the government down, without direct government intervention there is no one who can currently make any difference to the prices being demanded for electricity and gas.

It therefore stands to reason that advisers should look very carefully at the argument for consolidation and consider whether – even if it might make an immediate difference to the family budget – it actually makes sense in the longer term if economic conditions don’t improve and all that has been achieved is simply to push the problem farther down the road.

It might seem odd to hear this from someone whose bread-and-butter business is providing the means to consolidate debt efficiently via second-charge mortgages, but, with one eye on the implementation of consumer duty next year, I say this: If I were an adviser, I would be minded to look at longerterm consequences to ensure that today’s consolidation loan can stand the test of time when and if the recommendation given at the time is called into question in future. The outcome we don’t want is for future scrutiny to find fault with the initial advice.

I remain a total advocate of debt consolidation, but consumer duty will place the emphasis on producing good outcomes, not just treating customers fairly. This can only place extra pressure on advisers to look farther ahead when assessing the value of the advice they give.

LOOKING BACK

Writing about the extra care advisers will need to take when advising given the imminent arrival of consumer duty made me look back at how far we have come as an industry and the battle that has been waged to bring secured loans/second-charge mortgages in from the cold.

Although the industry had the fig leaf of previously being regulated under the Consumer Credit Act, the mere mention of “dual pricing” and “Rule of 78” is still likely to make a generation of older practitioners reach for the Prozac. However, in less than fifteen years, the sector has been transformed thanks to successive regulatory moves and the desire of a new generation of lenders, like Equifinance, to prove that a secondcharge mortgage can more than hold its own in a modern consumer-friendly lending market. M I

Don’t fear technology in fight against fraud

Matt Meecham

chief digital officer, Evolution Money

As borrowers become increasingly stretched financially in the face of the cost-of-living crisis, it is vital that as an industry we be on guard against fraudulent activity.

Earlier in the year, insurance giant Zurich UK reported a 25 per cent annual increase in fraudulent insurance property claims.1 It cited the rising cost of living as the main driver behind this sharp rise.

As some become more desperate, there is a risk we could see fraudulent attempts in the first- and secondcharge sector also rise. Always looking for an edge, fraudsters will use every tool at their disposal – and we must do the same.

To help guard against fraud, open banking and digital identification provide not only a speedier and more efficient application process, but also a more secure one, and can help mitigate some of the risks.

Yet with a large number of firms still relying on a manual approach, the use of such fintech needs to be rolled-out across the industry if we are to ward off potential fraudsters effectively.

Recent research from anti-money-laundering software provider SmartSearch found almost two-thirds of regulated firms believe hard-copy documents provide reassurance a customer is genuine.

Furthermore, some 40 per cent of firms in the South East believe manual verification is the only way to guarantee a person’s ID. Either through habit or misunderstanding, the industry still has an attachment to manual verification.

Over the last decade or two, counterfeit documents have been the mortgage fraudster’s weapon of choice. While great inroads have been made into helping lenders and advisers detect and recognise fraudulent copies, relying on the manual checking of such documents leaves all stakeholders vulnerable to scammers.

The less opportunity there is for fraudsters to duplicate or replicate documents during the application process, the better.

Manual checks of paper-based bank statements, payslips, and identity documents all potentially leave the door open to forgeries. Through open banking, however, lenders and advisers can access a borrower’s statements electronically – directly from the source.

A borrower’s identity, address, and financial information can be crosschecked against multiple sources, including other credit or loan companies.

As the mortgage industry moves forward, we are also likely to see the use of technology for digital ID accelerate further, with fingerprint and digital face recognition becoming more commonplace.

Another key advantage of Open banking is the insight it gives into a borrower’s expenditure, allowing for a deeper and more concise income and affordability assessment.

Open banking can provide a clear picture of a borrower’s incomings and expenditure, leaving no room for misinformation or the omission of any detail, either purposely or unintentionally, on the applicant’s part.

It is worth remembering that a borrower’s failure to disclose any outstanding debts or other financial information is also a serious issue.

Being able to view a borrower’s financial history electronically and over an extended period makes it easier for lenders and advisers to spot any red flags. It also helps highlight any signs of over-indebtedness or financial distress.

As well as a more accurate verification of a client’s identity and expenditure, one of the key advantages of a fintech-led approach is the removal of human error when it comes to remembering to check a borrower’s identity.

Astonishingly, recent research from Credas Technologies found that 23 per cent of homebuyers it surveyed had not been asked to verify their identity when purchasing a property.2 This may be explained by firms being overstretched and lacking sufficient resources, rather than any purposeful malicious intent.

The first- and second-charge mortgage markets have both recently experienced periods of increased demand, with the market proving exceptionally busy, which in turn will naturally increase the risk for human error. Even with the best intentions, mistakes can happen. Nevertheless, there is a legal duty to check a borrower’s identity, and not doing so could have significant ramifications for an adviser if it later transpires the borrower was acting deceitfully.

Second-charge providers such as us are already seeing the benefits of open banking and a digitalised approach when it comes to delivering a swift and secure application process.

In a busy market, as the cost-of-living crisis takes hold, it’s vital we use technology to help us remain vigilant against any attempts at fraud and/or misguided applications. M I

References: 1 Cost of living crisis fuels rise in insurance fraud | Zurich UK News

2 https://docs.google.com/document/ d/1JItQQCmVOAHLi_lMSKWT6Ru5kA97qoFyWuyjNOZY0A/ edit?usp=sharing