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LOAN INTRODUCER

March 2019

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P8 STEVE WALKER:

On a Promise

Champion of the loans professional

Second Chances Shining the spotlight on Seconds ROBERT SINCLAIR THE OUTLAW: GODFATHER PART II SECOND CHARGE IN-DEPTH INDUSTRY COMMENT

ROUND-TABLE


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Publishing Editor Robyn Hall Robyn@mortgageintroducer.com @RobynHall Managing Editor Ryan Fowler Ryan@mortgageintroducer.com @RyanFowlerMI News Editor Ryan Bembridge RyanB@mortgageintroducer.com Reporter Michael Lloyd Michael@mortgageintroducer.com Editorial Director Nia Williams Nia@mortgageintroducer.com @mortgagechat Commercial Director Matt Bond Matt@mortgageintroducer.com Advertising Manager Francesca Ramsey Francesca@mortgageintroducer.com Campaign Manager Joanna Cooney joanna@mortgageintroducer.com Production Editor Felix Blakeston Felix@mortgageintroducer.com Head of Marketing Robyn Ashman RobynA@mortgageintroducer.com Photography Alex Moore Subscriptions Nia Williams Nia@mortgageintroducer.com Printed & distributed in England by The Magazine Printing Company, using only paper from FSC/PEFC suppliers www.magprint.co.uk

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Comment

March 2019 www.loanintroducer.com

Steady if unspectacular The second charge market was on the up at the end of 2018. December was the sixth month in a row when the industry saw growth, according to the figures released by the Finance and Leasing Association (FLA). Over the whole of 2018 there were 23,529 new agreements compared to 2017, with an increase in value of 4% to £1.07bn, the data revealed. Fiona Hoyle, head of consumer and mortgage finance at the Finance and Leasing Association (FLA), said this growth contributed to solid single-digit new business growth in 2018 as a whole. She added: “The second charge mortgage market is expected to see further single-digit new business growth in 2019 overall.” Well that’s good news for sure. However, it is “Everyone needs hardly the deluge of seconds that were to work together anticipated when the to improve Mortgage Credit Directive came into engagement place. There remains a and promote the reluctance from some brokers to engage with positives” seconds. The uses of second charge products have been extolled for some time now. Yet still something isn’t happening in the minds of brokers. Now some four years after the implementation of MCD it looks like the Financial Conduct Authority lacks the appetite to find out what is going wrong. There are still some positives to take. Yes the market is growing, awareness is on the up and networks are engaging with the sector. It’s just a shame we haven’t seen more movement over the past four years to take second charge to the next level. As an industry everyone needs to work together to improve engagement and promote the positives of the industry. Let’s hope we see some more positives over the coming year.

4 Feature

Natalie Thomas asks if MCOB has been a success or a missed opportunity for all

8 Interview

Steve Walker, MD of Promise Solutions, talks seconds

11 Alan Cleary

A flexible option

13 Marie Grundy

The opportunity for seconds in 2019

14 Bright Star

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15 Tim Wheeldon

Time to consolidate gains

16 Round table

Our experts discuss the state of the second charge market

MARCH 2019

22 Stuart Gregory

It’s time to start thinking like entrepreneurs

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Time to celebrate? Natalie Thomas asks if MCOB has been a success or a missed opportunity for all

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ike the political chaos surrounding Brexit, the fees debate in the second charge market shows no signs of going away.Ever since the Mortgage Credit Directive came into play, effectively moving seconds in line with their first charge counterparts, questions have been raised over whether the fees charged by masterbrokers are justifiable. Rewind three years and the second charge industry was on the cusp of being integrated into the Mortgage Conduct of Business (MCOB) rulebook. Business volumes were predicted to rise and there was a cautious optimism that the sector was about to embark on a new era which would put seconds firmly on the map. While some of what was predicted has come to fruition,

regulation by the Financial Conduct Authority has not been without its hiccups. The first year was a time of transition for firms as they adjusted to the new regulatory norm. While the second year marked the ‘terrible twos’ for some, following the unearthing of irresponsible lending practices by the regulator and its subsequent ‘Dear CEO’ letters. So, as the market enters its fourth year of regulation, is it in the mood for celebrating or is it more a case of ‘don’t look back in anger’? Loan Introducer asks: March marks three years since the second charge mortgage industry was placed under MCOB, has it gone well, or been a missed opportunity in any way?” 

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Fiona Hoyle, head of consumer and mortgage finance, the Finance & Leasing Association

It’s been a challenging time for second charge lenders, having been moved from one regulatory regime - the Office for Fair Trading - into another - FCA Consumer Credit, then given only nine months to implement a third – MCOB. This is far from ideal but the industry has worked hard to embed the new requirements over the last three years, while continuing to provide high quality credit for customers. Regulating first and second charge mortgages under the same rules makes good sense and this consistency benefits consumers, lenders and brokers. It also removes unnecessary hurdles for lenders and brokers who want to be involved in both markets.

Steve Walker, managing director, Promise Solutions

The Mortgage Credit Directive caused massive change for second charge firms and generally the industry has responded well. However, it seems that new mortgage brokers coming to the market are not being upskilled by their peers to recognise and appropriately deal with seconds. CeMAP should better educate new brokers and firms should better test brokers on their seconds knowledge and processes. Training and Competence (T&C) schemes should reflect this and regulators should be holding more firms accountable. Some brokers are making efforts but little has really changed for most mortgage brokers since MCD and they dip in and out of seconds with little consistency to their scope of services or regard for the outcomes MCD sought to achieve. There is still a long way to go.

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Buster Tolfree, commercial director – mortgages, United Trust Bank

“It has been a mixed bag. Leading lenders have continued to raise their standards of service, product design and transparency and that has been great for consumers. However, on the flip side the market hasn’t grown as quickly as we may have anticipated, remaining stubbornly around the £1.1bn mark. Significant growth may happen when first mortgage brokers embrace the second charge concept more fully and this probably won’t happen until brokers can’t opt out of advising on specific product sets such as first or second charge only for example. Seconds will only get the full, mass market consideration they deserve when mainstream brokers routinely offer them as a valid alternative to a remortgage or further advance.

Damian Cain, director, Complete FS

It was expected that the second charge market would struggle to implement FCA regulations oversight, but in fact it went very smoothly. The FCA helped put a second charge option firmly on advisers’ radar when looking to advise on capital raising. CeMap should definitely include a second charge module though – a no brainer. It would help to normalise the sector further. Underwriting decisions did become a little inconsistent for a while after regulation as lenders got used to affordability calculations, but the whole thing has bedded in very well now.

Marie Grundy, sales director, West One Loans;

As well as creating a level regulatory playing field between first and

second charge mortgages, regulation has also ensured that there is now a greater level of consumer protection, with the vast majority of second charge residential loans now sold on an advised basis, by a qualified adviser holding full CeMAP qualifications. Regulation has in my view helped professionalise the sector. There are a number of specialist second charge mortgage advice firms who provide advice across a broad range of second charge products, which is invaluable given mortgage intermediaries are often reluctant or sometimes unable to provide advice on second charge mortgages. This is particularly prevalent within the Appointed Representative space where mortgage permissions are often not extended to include seconds. I would like to see the sector move away from terms such as “packager” and “master broker”. I think that they are outdated terms that do not adequately reflect the important role that specialist second charge mortgage advice firms play in providing regulated advice. This advice is backed by an in-depth understanding of their lender panel products and criteria that cannot be replicated in a sourcing system.

Tim Wheeldon, chief operating officer, Fluent Money Group

FCA regulation has been and continues to be a positive factor in the growing success of the sector. In part, it has been responsible for the boost in new second charge lending business that has seen volumes pass £1bn per annum in 2018. While we still have a way to go to see universal acceptance among intermediaries the fact that oversight now covers second charge lending in the same way that it covers its much larger first charge cousin has helped to legitimise the sector.

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The insistence by the regulator that a second charge mortgage should be part of every conversation that an adviser has with a customer seeking to raise capital, has helped to normalise a secured loan as a viable and compliant alternative to remortgaging. The journey to full recognition still has some way to go, but we are on the right track.

Alistair Ewing, managing director, The Lending Channel

Since the MCD was implemented in March 2016, the second charge industry has certainly grown up. Competitively priced products, innovative choice of lending and well run FCA regulated brokers ensuring they deliver appropriate lending outcomes for clients are all component parts of the market today. While the sector may not have seen the high levels of growth we all hoped for, lending volumes are steadily growing, despite FCA reviews and too much press commentary devoted to the ‘great fee debate.’

Joe Breeden, managing director, Crystal Specialist Finance

I’m a fan of regulation, I feel it was

a good move. With it comes education and those in the sector are forced to look and observe the latest rules. Perhaps there have been things that have lacked as part of the follow-up, such as amending CeMap to include seconds because I still don’t think there is enough awareness amongst first charge brokers. Regulation also hasn’t forced enough first charge brokers and their clients to consider seconds, which of course all starts off with training and CeMap and then whether that training is being adhered to on all of the suitability 

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reports for remortgages. I think just a little bit more support from the regulator in terms of the follow-up process would have been good. Having said that, regulation has been good for the market and things are generally buoyant and we are seeing more mainstream brokers interested in second charges as an option and I think much more opportunity lies ahead when the purchase market is on a bit of a slowdown.

Anna Bennett, marketing director, Positive Lending

So much has changed during the last three years when the FCA took over regulation of second charge mortgages. The sector has matured and grown and it keeps growing. The latest reports reveal second charge lending is up from 2017 to 2018 and repossessions remain low over the same period. We feel it should be mandatory for intermediaries to consider second charges when reviewing their client’s remortgage and further advance, rather than just recommended practice. In a large number of cases, when we undertake this review, a second mortgage provides the most cost effective and flexible option. We work with many competent brokers who are adept at firstcharge mortgages but less confident with second charges; or they simply cannot access whole of market – generally as this is less frequently an area they need to research. That’s when a master broker comes in to their own. Having second charges covered within CeMAP would make sense; there is plenty common ground with first charge and second charge mortgages and CeMAP could easily cover off the differences and provide good training in this product area.  MARCH 2019

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Interview

Making a Promise Loan Introducer caught up with Steve Walker, managing director of Promise Solutions, to talk all things seconds You have been arranging second charges on behalf of mortgage brokers since the early 90’s. How has the relationship with brokers changed? It’s hard to believe there was a time when secured loan brokers used to sign up applications in the customer’s home armed with the lenders cheque book and authority to issue the cheques on the spot. So a lot has changed. Today, broker relationships with second charges fall mainly into two camps. Firstly there are those who still adopt a 1990’s approach to seconds and hold outdated perceptions of the product and how they should be sold. For them a second charge is a possible after thought if they can’t place a remortgage. There is little clearly defined process and scope of services is a blurred line. Secondly there are those who are far more engaged with the products, are trying to adapt to MCD and seek out second charges to meet specific customer needs. These brokers have taken time to educate themselves on the benefits of seconds to their clients and put in appropriate processes. There just aren’t enough brokers in the latter camp. Why hasn’t there been greater uptake of second charges by brokers? People say its education. That’s part of it but being from a farming

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background there is a saying which sums it up for me. “There’s no point sowing seeds on barren land”. Master brokers, lenders, networks and trade bodies have been banging the education drum for years and those brokers who are open to new ideas are moving in the right direction. Others have more closed minds perhaps because they think seconds will diminish their mortgage business, or it’s too much hassle or they have outdated opinions of the product. Whatever the reason there is probably a TCF question left unanswered. Unless something significant changes it could take a generation before every broker is on the same TCF / MCD playing field. The regulator has to play its part. Its current approach seems to be to regulate from top down through the lenders and the main players in the seconds industry but this isn’t filtering down to the brokers who are, or should be, originating the enquiries. So long as brokers continue, out of convenience, to deny their clients access to seconds, consumers will get poorer outcomes and those brokers seeking to do the right thing will be disadvantaged. What do brokers say are the main barriers to getting more involved in seconds? The one we hear time and again is compliance. By this I mean the amount of time some brokers perceive they have to spend justifying why they are considering a second – prior to even referring

it or confirming the case has legs. Brokers have told us they would rather decline an application and suggest the borrower reapplies next year than engage in what they perceive to be onerous compliance work for little guarantee of reward. This is a general theme especially where the firm has a very prescriptive process and we see this particularly with debt consolidation cases where brokers have to go to greater lengths to justify why a loan may be suitable and why a mortgage isn’t. It’s a difficult scenario because keeping records of what you have done and why are the backbone of a robust compliance process. I expect firms could perhaps make the process easier or explain it better to their brokers which would break down perceptions or remove a few excuses. What do you think brokers want from specialists like Promise? Before you even get into the details of a product I think brokers want minimum hassle, a good return on their time, and don’t want to be embarrassed in front of their clients. That means they want a simple process, easy access to an experienced underwriter who will work with them, and the loan to go through smoothly. We provide this at Promise by allowing brokers to be as involved as they like, from giving us just a name and number through to

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keeping control of the advice themselves and relying on us for product and lender expertise. Our underwriters and advisers seek to build strong working relationships with their brokers and have to be problem solvers, overcome obstacles and help brokers get to the moment of truth as quickly as possible. A fast “No” is as important as a fast “Yes”. It’s important that brokers trust and gel with their underwriter and if there is clash of styles or personality, they can select an alternative underwriter via their preference page or speak to their relationship manager who will do it for them. Brokers also want access to a genuine whole of market panel of lenders, fair and transparent fees and never underestimate the importance of good communication. Communication was a weakness for Promise and whilst brokers had access to our case notes and were notified by email at key stages I never felt it was good enough. For the last 18 months we have been building a totally new processing system which itemises everything needed to complete an application, who is responsible for satisfying that requirement, plus detailed notes about what is happening on each item. Add to this the closer relationship with their underwriters and it makes the ownership and progress of every task crystal clear, brokers get a daily list of everything involved in completing the case including the status of the task and detailed notes to explain what’s happening. Brokers can select how often they want an update – daily or less frequently and the feedback from brokers has been fantastic. The other benefit is that they hardly need to call us so we can get on with processing their cases. Is there a risk to brokers who don’t integrate seconds in to their mortgage business? Well there is obviously a compliance risk and my view is

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that you are either in seconds and offer them consistently or you are out and don’t bother at all. There are many brokers who dip in and out without a consistent approach which must mean that some borrowers are overlooked for a second or occasionally offered a first where the second was a better solution. With seconds being an afterthought rather than part of a defined process to arrive at a suitable outcome, it must raise a number of regulatory and TCF questions which a detailed audit would pick up; the likelihood of that happening is small for most brokers and I suspect attitudes won’t change until the regulators focus on the start of the sales process rather than lenders and distributors. There is however a real commercial downside to not offering seconds at all. Brokers who don’t sell or refer seconds often expect their clients to wait until the time is right, but borrowers invariable don’t do this. Instead they apply online and end up in the hands of a competitor who then sets about writing the loan or mortgage and replacing any protection products. The first the original broker knows about it is when he is notified of a lapsed

policy or a claw back by which time the sales opportunity and all future business from that client is lost. I really believe that brokers should promote seconds rather than avoid them. If their clients know they can offer loans it can only bring in more business, much of which may well end up as a remortgage, what doesn’t still has a good chance of completing as a second charge. Do you have a last word on the fees debate? This is a debate stoked by a few firms more intent on self publicity that solving a problem. Quite why they want to convince mortgage brokers that 10% fees are the norm is beyond me. Ask lenders and they will confirm that average fees, often including valuation, are under 5%. There are some firms charging more than this average as a matter of course but the same applies in the first mortgage industry. Market forces should be allowed to take care of this plus the regulator should be able to identify firms charging high fees through the data it receives, andtake any steps it thinks appropriate.

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There have been a few stories in the news recently which I think demonstrate just how flexible second charge loans really are and how they can provide a solution in a wide range of different scenarios. The first story was about how nearly half of buy to let owners are ‘pension pot landlords’ who are using their properties as a source of retirement funding. With more people looking at buyto-let as a way to prepare for retirement, a second charge loan could be the ideal solution. By using the equity in their existing property, they could raise the capital they need to put a deposit down on a buy-to-let property. The second story I read was about how there are a million more young adults in the UK living with their parents compared to two decades ago. There are a variety of reasons for this, but chief among them seems to be rising house prices and the difficulties in raising a deposit. With half of those born between 1980 and 1996 predicted to be living in rented accommodation into their 40s and one-third renting into retirement, the Bank of Mum and Dad has become increasingly important in helping them realise their home owning dreams. But what happens if their parents aren’t in the position to be able to help them with the deposit? Again, this is a situation when a second charge loan could help. Not only does it help them raise funds quickly, it enables them to release capital from their property without the need to remortgage and possibly incurring early repayment charges. It also helps them to protect their existing first charge rate. The third story I read was about the difficulties the growing numbers of self-employed workers in the UK face when trying to secure finance. With the end of the tax year on the www.loanintroducer.com

Alan Cleary managing director, Precise Mortgages

horizon, many self-employed workers will be looking for assistance in paying off their tax bills, particularly those whose trading year doesn’t tie in with their tax year. A second charge loan on their existing residential property could help them raise the money they need to pay the bill. If, after your research, you think a second charge loan is the most appropriate solution for your customer, we’ve made it as easy as possible for you to arrange this. You have two choices of how to submit your applications – either directly through our in-house specialist team or through our approved panel of master brokers. By coming to us directly, you’ll benefit from the support of one of our experienced underwriters who will help you from start to finish. You’ll still be in

control of the arrangement fees and you’ll be able to apply your normal fee structure. Furthermore, you’ll receive a procuration fee. If you need a bit more help, our panel of master brokers will use their experience and specialist knowledge to arrange your applications. With a range of product options, a choice of submission routes and dedicated support every step of the way, it’s no wonder we’re ranked as the lender brokers are most likely to recommend when discussing second charge loans with their customers. It’s worth mentioning that whatever a customer needs a second charge loan for, they should always seek appropriate advice to make sure that a second charge loan is suitable for their circumstances.

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The opportunity for seconds in 2019 The specialist finance sector, like most others, had an interesting year in 2018. As a specialist finance lender – with particular expertise in second charge mortgages – the first quarter of the year appeared to be dominated by the impact of the product transfer market. At the time of writing, UK Finance have reported figures for the first nine months of 2018, and they show that a staggering 1 million+ homeowners switched their first charge mortgage product with their existing provider. By value, this is £146.2bn of mortgage debt refinanced internally – keeping the market on course to approach £200bn for the whole of 2018. Product transfers – where the borrower moves to a new rate with the same lender, without changing any other terms of the mortgage – meant that additional borrowing needs were less likely to be discussed and may have caused a dip in the second charge mortgage market at the beginning of the year. But since then, the market for second charge mortgages performed incredibly well, with 12-month lending in excess of £1bn. Indeed, 2018 finished strongly, with completions exceeding £100m in October, the first time since 2008. We expect the second charge mortgage market to continue with steady growth through 2019 – as many borrowers who transferred may need to pursue additional finance. The uncertainty around the UK’s exit from the EU has seen longer term fixed rates become more popular which means these borrowers are likely to be tied into their current deal for a number of years. If they do need to raise additional funds, second charge mortgages could prove the best choice for them. So how do we spot second charge mortgage opportunities? When talking to brokers, we’ve www.loanintroducer.com

Marie Grundy sales director, West One Loans

found that identifying circumstances where a second charge mortgage might be the best option for their client is one of the biggest challenges they face. There are a number of scenarios where they might be better than the alternatives, such as a further advance, remortgage or an unsecured loan. If you have a client that:  Needs to raise capital quickly or has larger borrowing needs  Wants to avoid paying an early repayment charge or retain their current mortgage rate, perhaps because of a product transfer as mentioned above or has recently remortgaged  Has an interest only mortgage and wants to avoid disturbing their current mortgage arrangements

“We expect the second charge mortgage market to continue with steady growth through 2019”  Is self-employed, is an older borrower or has more complex borrowing needs  Needs to borrow more than the maximum limit of an unsecured loan or prefer to take out borrowing over a longer-term  Has been denied a further advance or unsecured loan  Has a high street mortgage with an attractive rate but with a deteriorating credit profile  Wants to use the money for something the traditional lender won’t allow, such as debt consolidation, business funding, paying a tax bill, paying school fees or raising a deposit for an investment property Then a second charge mortgage might be the best solution.

Making predictions for any sector - at the beginning of any year - in articles like this can often feel like misguided optimism. Trying to predict what will happen in the finance sector in the year of Brexit might just be madness! But we do remain bullish about the sector. The general feeling is that Brexit will cause property prices to fall, which may impact the amount of equity people can borrow against. And this might give you a feeling of ‘doom and gloom’ for the market as a whole. But uncertainty brings opportunity – and this is what specialist finance is all about… putting people in a position to take advantage of that opportunity. With their flexibility in providing funding solutions in a variety of circumstances, second charge mortgages’ popularity will continue to grow. For example one trend we are likely to see in a more stagnant property market is an increase in demand for home improvement loans as borrowers opt to improve rather than move, which is the second most popular reason for taking out a second charge mortgage. So let’s end on a positive. 2019 may well bring the greatest opportunity for advisers to proactively support their clients with specialist finance. Remember there are a number of different options to access second charges, enabling mortgage intermediaries to provide advice or outsource to a specialist second charge advice firm. This will ensure you protect your clients whichever way they choose to release equity in their home by offering them the best possible outcome based on their needs and circumstances – and second charges should always be part of that conversation.

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A helping hand for tax bills At this time of year, it’s not unusual to encounter clients who have underestimated their tax liability and are looking for options to raise funds to pay a larger than expected bill. Fortunately, it’s possible to use a second charge mortgage to raise funds to pay a tax bill and there are lenders that are happy to lend money for this purpose as long as the client can provide a satisfactory reason why they didn’t have provisions in place to pay the bill and are prepared to pay future bills. We increasingly work with clients who are exploring the use of a second charge mortgage to pay a tax bill and prevent proceedings by the HMRC. One reason for this could be because the HMRC stopped accepting payment of tax bills by credit cards on 13 January last year, and so mortgages became a preferred option for those who do not have the capital ready to clear the bill. There are, however, some considerations. It’s worth stressing that people should always address their HMRC tax matters sooner rather than later. It is also important that they maintain a dialogue with HMRC as this is the best way you can try to resolve any issues which may have arisen as a result of a tax inquiry. 

Darren Perry head of second charge mortgages, Brightstar Financial

mortgage interest tax relief on rental income and so this is the first year that landlords will be feeling the pinch as a result of these changes. Prior to 2017, landlords would only pay income tax on their net rental income, or profits, which mean that they could deduct any mortgage interest payments from their taxable income as well as any other expenses incurred throughout the year. As most landlords choose to take an interest only buy-to-let mortgage, it meant they were able to write off all of their mortgage costs. So, for a landlord charging £950 per month rental income, with mortgage interest payments of £600 per month, a basic-rate taxpayer would be liable for £840 in tax and a higher-rate taxpayer would be liable to pay £1,680 in tax Since April 2017, tax relief on mortgage interest has been tapered until it will be completely removed in 2020. The tapering is:   In the 2017-18 tax year, landlords can claim 75% of their mortgage tax relief   In the 2018-19 tax year, landlords can claim 50% of their mortgage tax relief   In the 2019-20 tax year, landlords can claim 25% of their mortgage tax relief

So, from April 2020, landlords will no longer be able to deduct their mortgage costs from their rental income. This means all of the rental income they earn will be taxable, and they will instead receive a 20% tax credit for their mortgage interest. Basic rate taxpayers will see little change, but higher rate tax payers could see a significant increase to their costs. In the same scenario, a basic-rate taxpayer will be liable to pay £840 in tax, representing no change.However, a higher-rate taxpayer, will be liable to pay £3,120. This is double the amount of tax they would have paid on their 2018 tax bill, before the changes came into force. Consequently, many landlords are now looking at second charge mortgages as a way of meeting the increased costs associated with owning buy-to-let property. And it’s not just landlords. We recently workedwith the chief executive of a company that has grown so quickly, he had underestimated his tax liability and wanted to raise funds to pay his tax bill. So, for your clients who have been hit with an unexpected tax bill, a second charge mortgage may provide the solution.

Tax changes hitting landlords

This year is likely to be particularly painful for buy-to-let landlords as it’s the first submission that includes reduced tax relief. Changes to the income tax treatment of buy-to-let may have been announced some time ago, but the financial impact of these changes are only just starting to hit landlords in the pocket. Tax returns for 2017-2018 submitted for the end of January 2019 deadline are the first to include the staggered removal of

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It is time to consolidate gains Figures published at the start of February by the Finance and Leasing Association (FLA) have revealed that year on year lending within the second charge mortgage market rose by 4% during 2018 to £1.07bn and by 7% in volume to 23,529 new agreements. Overall figures for December represented a remarkable sixth consecutive month of growth for the sector compared to similar figures for 2017. Completions for October exceeded £100 billion for the first time in ten years- a considerable achievement. The FLA’s Fiona Hoyle highlighted the ‘solid’ rates of growth experienced across the industry throughout 2018 and predicted similar, single digit gains for 2019. Some lenders have responded to the upsurge in demand and confidence by announcing rate cuts on their variable and fixed rate second charge product ranges, as well as increases in loan sizes - a sign of the buoyancy which is beginning to manifest itself throughout the sector and a welcome (not to mention ironic) contrast to the reversals that have been witnessed over the past few months in other areas of the mortgage industry. So, what has changed? As many within the industry will attest, second charge mortgages have suffered in the past from a widespread sense of misplaced bias based on past understanding of the sector, reticence, or simple incomprehension, especially when compared to remortgage options. Fluent Money, among others have led a campaign to urge brokers to engage with the seconds market and appreciate the greater extension in choice that second charge options provide, when considering individual needs and circumstances. Customers with ‘unconventional’ modes of income or employment for example, or those who are www.loanintroducer.com

Tim Wheeldon chief operating officer, Fluent Money

locked into fixed rate mortgages with prohibitive ERC’s, who wish to borrow at a higher LTV value or protect an existing mortgage rate, are just a few of the scenarios in which remortgaging options are often unsuitable. Prior to the introduction of the Mortgage Credit Directive (MCD) in December 2016, low levels of product knowledge, concerns about fees and a failure to recommend second charge loans to clients were being cited as some of the primary reasons for the low volumes of business that certain firms were generating - symptoms of the issues and problems which the industry is still looking to overcome. In addition, procedures and levels of paperwork

“The second charge sector has entered a new era of growth” were also identified as contributing to the low recommendation levels amongst brokers, as well as a widespread inability to distinguish between situations in which seconds would be most appropriate for customers - a frustrating state of affairs. However, the introduction of the MCD brought the second charge mortgage sector further into line with its first charge cousin and asked brokers to make customers aware of second charge options for the first time. Along with the growing impact of the FCA’s regulatory constraints and limitations and the heightened levels of competition within the industry (which has driven down both fees and interest rates while also offering a wider choice of products), the second charge sector has entered a new era of growth and mainstream acceptance, one defined

by a renewed sense of possibility. There has also been a decisive move towards new and previously untapped areas of influence within the market, with growing numbers of buy-to-let landlords using second charge loans to grow their portfolios for example, or to fund improvements on existing properties and a comparable rise in the number of customers using loans to consolidate debt. Indeed, many people within the industry now believe that the uncertainties of a volatile Brexit and the rise in the number of credit adverse lending scenarios which this could preface, will provide an opportunity or springboard to even greater gains in the next few years- a feeling which has seemingly been strengthened by the significant rise in the number of brokers searching for default or debt consolidation options over the past few months, according to the latest criteria activity tracker from Knowledge Bank. But, what of advisers themselves? Have they changed? Well, according to a survey of 600 mortgage brokers conducted by the authorised adviser support group, SimplyBiz, in July of last year, 85% of intermediaries now claim to have an ongoing involvement with the secured loan market, with 60% indicating that they refer business and 25% that they write the business themselves. While some within the second charge market have questioned the accuracy of these findings, there seems little reason to doubt that the figures indicate a meaningful shift in attitudes. So, as we venture ever further into 2019, we can see an industry which is characterised by greater revenue and custom streams, wider opportunities and regulatory safeguards and increased levels of acceptance amongst both consumers and advisers. In short, the future is there to be won.

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Second chances

Our panel takes a closer look at the second charge market Robyn Hall: December saw the market report its sixth consecutive month of growth. How was 2018 for the second charge market on the whole? Steve Walker: Pretty flat really. I don’t think anything particularly exciting happened during 2018 to spur any growth. I think some brokers are coming to the party better understanding seconds. I’m satisfied but there’s nothing to get excited about. Cathy Beaumont: It is better. There is a definite need for the second charge market but there’s still a definite need for good solid products. It’s getting the education out there for brokers. Stuart Johnson: In terms of first choice seconds business in 2018 was about 10% up from 2017 for us which is an improvement but nothing to get excited about. It’s either staying the same or going the right way. Buster Tolfree: There is absolutely a place for the product and customer need but the market isn’t extensively growing. 2018 as a whole was about less than 5%, probably 3% up year-on-year. It’s basically a flat market for a few reasons. The B2C aggregator led broker market is pretty stable and pretty much where it can get to unless there’s a greater consumer awareness. I think the real growth needs to come from a bigger level of acceptance from the B2B area. A lot have tried to push the agenda in that area, but I still think there’s a general lack of acceptance of seconds. I’m not saying advisers don’t consider seconds alongside a

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remortgage but as long as there’s an opportunity to opt out of it I don’t think there’ll be widespread acceptance. Also, this might just be the market. There’s been some growth but not a big bang in growth. Maybe we should accept that if the first charge market is £270bn, the second charge market is about £1.1bn. SW: I’m not sure because if you accept that then you accept the mortgage world have wholeheartedly got it and they haven’t. There are those brokers who are still operating as they did years ago, throwing it at master brokers seeing if they can do something with it and others trying to follow MCD, educate themselves and consider seconds in an appropriate manner. I think there’s a generational divide and until a new breed of brokers work their way through by thinking the modern way, we’re not going to achieve the full potential of the market. RH: But how are we going to get brokers to think that way? James Briggs: MCD has been a little bit disappointing because of the broker’s ability to opt seconds out of the scope of the service which means there’s a proportion of clients remortgaging when seconds could’ve been a better solution for them. The seconds market is disproportionately small compared to the remortgage market so something’s not working somewhere down the line. We need to hammer that message down to brokers. We’re in advanced talks with a couple of major mortgage networks whose brokers have only historically had the ability to go to

master brokers but will soon this year be able to go direct. That’s not a way of cutting master brokers out of the equation but a way of increasing their knowledge and engagement. If they have the option to do it themselves they’re more likely to think of seconds as an option for their client. If the lender can’t help them go directly to them they can engage with the master broker. On the positive side we haven’t seen a drop in second charge business when we have in the number of purchases in certain parts of the country due to Brexit. BT: I think with Brexit there’s an opportunity for more seconds. When less are moving house people tend to improve what they have and do home improvements and I think our sector is one of the areas that potentially has the least impact from Brexit. SW: I agree but the problem is the connection between you, us and the client has the broker in the way. They say they’re getting fewer enquiries because of Brexit and because seconds isn’t a product they’d normally go to, they’re not thinking about how they market it to customers because it might benefit them now instead of a remortgage. Brokers say everything’s quiet because of Brexit. A lot don’t change their model from just doing firsts. CB: I still think a client’s perception on seconds is more a ‘oh really’ attitude because it’s had bad press. Despite better products becoming more normal you get some resistance from some clients when mentioning a second charge.

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Adam Tyler, FIBA; Buster Tolfree, United Trust Bank; Liz Syms, Connect for Intermediaries; James Briggs, Precise Mortgages; Stuart Johnson, First Choice Finance; Steve Walker, Promise Solutions; Cathy Beaumont, London Money; Jon Sturgess, Masthaven Bank

SW: I don’t see that at all and don’t think the average consumer knows what seconds is. BT: We need to sell it’s a solution to a need rather than saying it’s a second mortgage. RH: How do you feel about master brokers being cut out of the equation? SW: It’s inevitable. Lenders may say they don’t want to cut them out but it’s inevitable mortgage brokers will inevitably go direct to lenders on the cases they feel they can handle which is a matter of time. JB: In the first charge market though there’s still a need for intermediaries and packagers. SW: You could argue there will be some lenders like UTB and Precise with more vanilla deals that may go direct to the lender. JB: There’s only a small percentage of advisers engaged with seconds fully at the moment so it’d be great to increase that. SW: It’s good lenders are educating brokers. JB: I believe we’re growing the

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market by having a direct proposition. SW: I’m not disagreeing. I think it’s good you’re doing that and by being specialists we’re more of a niche. BT: There’s so much choice. Some brokers will want to go through a packager or master broker because they don’t want to deal with it and are happy splitting the commission. Others want to retain the customer. I think it’s just about giving choice. The more people that see the product and understand it, the more likely they’ll sell on. Adam Tyler: That’s the key. The more advisers that see it and use it will probably want to use packagers to do that. As well as being FIBA chairman I’m a commercial finance broker. I don’t want to write second charges, I want to introduce them to others like Steve. If you grow that cake and introduce it to commercial finance brokers as a solution for them, they don’t want to write that business, they want to use a specialist to do so, so I think packagers will still have a place. Liz Syms: The specialist market is getting more complex and whilst there are still vanilla products brokers will be happy going direct

to, more and more are finding a specialism like becoming a commercial finance broker and then still need someone to send some business to. If a broker uses Precise a lot for buy-to-let and then are comfortable using them for seconds but it doesn’t fit them, then the broker might not know where to go and needs to use a specialist to help them do that case. There’s a lot of lenders and products and specialisms and you can’t do them all. Jon Sturgess: I don’t think mortgage brokers can really rely on a soourcing system to point you in the right direction. We have a good internal system but I know my underwriters are striving to beat it and find something better. When you start dealing with affordability and debt consolation, which brokers hate dealing with, and talk about the bits round the edges that makes the difference, I think there’s a potential detriment for consumers if you rely too much on a sorting system. RH: Is there a decent sourcing system for seconds? SW: They’re all indictive guides to point you in the right direction but once you get into underwriting and

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the fact find and you know what a lender will and won’t do. It’s the same in the first charge market.

The solution of putting seconds in front of them will make it harder to know.

LS: There is no one product in the first charge market that covers every piece of criteria for every product range. Brokers have to look at criteria systems, quotation systems and talk to the BDMs and look at the website.

BT: How can the regulator be comfortable eliminating one product over another? How can a second charge broker only do seconds and not first and vice versa? That’s not the best customer outcome.

SW: If it’s a vanilla case with a vanilla customer getting the right product that’s fine but with more complicated cases there’s so many nuances involved. JB: I don’t think it’s been a detriment. I think it’s helped to develop the second charge market. I think there’s a lot of granular detail but the nature with the systems is finding the cheapest product first. If it doesn’t fit they work their way down. It’s helped us develop our proposition. BT: I think most advisers look at a sourcing system to see what’s out there, comparing remortgages to seconds. If you take it at face value it’s not great but it’s invaluable as a guide to start with. SJ: When you do a source the results should be all encompassing so even if you don’t currently offer seconds if you’re looking at a remortgage results through The Mortgage Brain etc should show seconds as an option. I think it’s almost a duty of care on the sourcing system providers to gather more information and work with the lenders to give that. Brokers using the systems will keep seeing seconds come up and won’t be able to ignore it but at the moment it’s easy to just look at first charge remortgages.

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JB: Customers can get two different products depending who they applied through. Both can’t be the best outcome. SW: In both scenarios if you’ve narrowed your scope you have to be upfront and tell the customer. The problem is brokers not having the scope and jumping in and out of seconds when it suits them. RH: Are we seeing rates dropping in the market? JS: Rates are roughly staying where

they are. We’re comfortable where we are. I’d be concerned if they drop much lower. We still have to make money out of the deal. Dropping sub threes is not good for the market. RH: Is it a rate driven market? CB: It would be to start with but I think it’s the personal circumstances so whilst you’d use that sorting system and try and go for the most competitive rate, personal circumstances might not determine that in the end. SW: I agree. You strive to get the customer the lowest rate but once you get into the nuances of the application there are overriding factors meaning they might not qualify for them. SJ: There’s the old lead generation route of low rates hooking your clients in but I think in reality how much business is really written from them really low rates? If you drive rates too low, everyone has to make money out of it and there’s nowhere to go. It’d be interesting to see the rate spread of what’s written on a second. Many using seconds don’t qualify for an unsecured or a remortgage so aren’t good enough to qualify for those rates generally. BT: I think we’re near the bottom of where we can go. If we’re assuming Paragon’s 3.5% is the lowest rate, you have to remember a second is a higher risk product. I think there’s been a much bigger drop in second charge rates compared to first charge because the market hasn’t grown so everyone wants to write on lower rates. There’s been so much chopping on rates because the market hasn’t grown. But

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there’s a risk reward element.

now are more technically aware, know the nuts and bolts of the products they have and can help the adviser understand how best to actually underwrite a deal initially. It’s just as important that if it’s not going that way, don’t start it down that journey. BDMs tell advisers all this.

JB: There’s lots of lenders chasing the sub 65% business where all the headline rates are. If there’s any movement or tweaks that need to happen that needs to be on the higher end of the scale, the 80%, 85%.

BT: I think there’s a lot less margin in financial services than there was 10, 15 years ago so if someone goes to spend time with someone they have to add value.

LS: I think the benefits of lower rates out there is creating the perception for brokers that the seconds market isn’t as expensive as they perhaps thought and is worth considering now. SW: A lender will come out with a new rate and come to the top of the souring system and for that very narrow band of products they’ll probably win for a while but all they’re probably taking is probably 5%, 7% of the market. Most of it is well below that. It’s not just the leading rate that’s important. AT: I think rates across all the markets have stablised. JB: The lenders have to service the business they get. There’s no point fighting for rates then taking a week to work on it when it comes in. RH: Do you think lenders need to invest more in their support teams to help the seconds process? JB: We have a dedicated team of underwriters in the office. I’ve been working hard upskilling our BDMs on bridging, and on seconds, whether direct or through a master broker, to add knowledge and value to brokers. Brokers want to see BDMs who can add value to their business. That’s been a big focus for me and we’ve had some really positive feedback on the back of it.

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BT: We have a network of BDMS, six or seven, across the country talking about firsts, seconds and bridging. We have a broker support team in the office. RH: How important is the BDM for you Liz? LS: Absolutely important. If you have a good BDM then if things aren’t going quite as planned you have someone to turn to, to provide that support. That’s the difference between the lender who you can build a relationship with and one you don’t use much. SW: A bad BDM is not worth having. A good one is invaluable. BT: It almost needs to be called something different because they go in, understand your business and are able to say ‘you should be doing this and placing this here’. LS: Maybe a solutions manager. SJ: We’re seeing BDMs more as trainers now. We have a training session with the advisers. BDMs

AT: Lenders ask me all the time if I know any good BDMs that are looking to move. So, the question is where will the next generation of BDMs come from? Within underwriting teams? How do we educate them? Do we need to bring in exams? RH: That comes up in bridging discussions, where the next generation of bridging underwriters may come from. Talking about margins a cap on the fees charged by master brokers has been mooted in some sections of the industry. Do you think that fees should be capped? CB: Yes they should, as far as London Money is concerned. BT: By who, the regulator even though they’re not a price regulator? CB: No, I don’t think it should be from the regulator but I think it’ll come from them. You can’t charge 10% on a second charge deal when they’re probably doing the same amount of work as a first charge deal. Why should that be so different, and why should that consumer pay that huge fee? Is  that determined just by the master

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model so I’d like to see those networks provide more options for those ARs or go direct to pick a fee model to suit them.

brokers or is that what it’s always been? Is that giving the second charge market the best information going forward with their clients? So, clients will see a huge broker fee on the second charge as opposed to the first charge. Why should they be charging extra fees for that? I don’t think it’s helping the second charge market. SW: I think we’re in a principalbased environment so if you cap them are you moving towards base? I don’t think that’s the regulator’s job and I don’t think they should be capped. I think lenders have some capital in place. I think there may be some problems in the industry with some firms overcharging but I don’t think there should be caps. As an adviser you have to look at every case individually and work out the costs and what’s going reasonable and caps don’t deal with that. If you take the 10% fee which includes a valuation I presume, if it’s on a £10,000 loan and the valuation is £700 because it’s a big property, then 10% isn’t actually enough in that scenario. I do recognsie there’s some firms taking advantage. London Money has been quoting these horror stories for a long time but I’m not aware of it. LS: We decided not to charge at 10% and try and align the charging to make it similar to what a first charge would give us to give that level playing field. But at the same time we expect the client to pay any fees upfront such as valuation and referencing fees, so there’ll be circumstances where we might not be picked because the client doesn’t want to do that. The client needs to have a choice. It’s important that choice is here. There’s an element of self-regulation

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RH: Does the fact so many commercial brokers don’t have mortgage permissions create a barrier?

in the market. Regardless of percentages some lenders will still say as a maximum you won’t get more than £5,000 so a monetary guidance within the industry on a self-regulated basis might be more appropriate. For us all to discuss and say what we think in the industry would be appropriate, what you get net of any costs in comparison to first charges and so on. BT: Some brokers will say we charge a flat 4.95% fee and then comparing that to someone else who’s backended. That broker though is also charging a separate round fee and separate packaging fee. We write about 15% of the market give or take and our average fee is just over 4% so 10% fees is not the market. It’s a great soundbite but it’s not what we see. JB: I agree. Different master brokers have different models and costs and the market finds it own level. People shop elsewhere. The one area there’s a bit of an issue is where appointed representatives have a limited panel of master brokers you can go to and their fee model is not in alignment with that adviser’s fee

AT: Commercial finance brokers in the main have been brought up in the commercial finance industry and have not come across from a regulated background. If I see a customer and they say ‘I need £100,000 for my business’ I think firstly of a business loan for them not using their property. We run into enough barriers when asking for personal guarantees. I don’t think the permissions is a barrier at all. You’ll never get those brokers to get those first charge permissions. I think education is a barrier. I could talk to many of these guys asking ‘have you thought of seconds?’ and it’d open up their mind and they’d see more business. SW: They’d happily just refer cases onto a specialist. AT: Yeah, they would. And your business would grow if I took you to FIBA to talk to members because you’d had more people give business to you. We’ve had that from IFAs too wanting to get involved in bridging, asking how they get involved in our lender panel. I’ve seen other sectors evolve and not the seconds market so much. I’ve seen more and more advisers doing bridging. JB: Seconds for business purposes is now our fourth most common purpose. 52% of our clients last year were self-employed which can be commercial downvaluations if

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buying commercial premises, stock machinery or IT, vehicles or stock. It’s flexible. Clearly, we need to do something to bridge that knowledge gap because there’s a lot of potential clients there we’re not tapping into. AT: There’s been more education from what you’re doing saying let’s use this. As long as it works out from a tax perspective why not? We should we preaching it’s the fourth most common use more. LS: I agree about the regulation piece. Our network has grown on the back of commercial brokers and at the beginning only offered them those permissions but when lots happened we opened up residential permissions for our network members and only around 30% of them have decided to go ahead and go through the Competent Advisers Status and then there’s the added CeMAP requirement which I think is stopping them going down that route too. I think they’re quite happy doing the business they do and referring their residential mortgages but if they understood some of the benefits of seconds they’d look to refer seconds too. RH: Seconds have been used quite a lot for buy-to-let purchases in some cases. Is it a useful tool for landlords? JS: We do. Lots of buy-to-lets, lots are using seconds to leverage offer their current portfolio and continue to purchase down the line or home improvements. We see it as a big part of the market. BT: We don’t do buy-to-let seconds but do a fair amount on the residential to purchase the buy-tolet.

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LS: I think there’s a flaw in the market slowing down seconds. A vast majority of specialist lenders in the market won’t allow a second behind them so if you’ve got a landlord buying with a specialist lender today on a 5-year fix and those specialist lenders aren’t offering further advances and second charges there’s an issue. 70% of the specialist buy-to-let market don’t consent. RH: What’s our expectations for 2019? CB: Precise came in with a no ERC product. I don’t know how much the market will grow but I think we need more education with advisers and clients. We just need more products and rates out there and more brokers to consider seconds as part of the process. AT: We have an event in Manchester and I’m going to ask a lender

partner to come and talk about second charges. JB: I think it’s helpful. I think more and more clients have been taken out of the 2-year remortgage scale with 5-year fixes more popular than ever. The product transfer market last year was £150bn. There’ll be a big pool of clients who’ll need a capital raise, can’t get a further advance and it doesn’t make sense to remortgage them so that could give us an injection over the next 12, 18 months. And the high street is shying away from debt consolidation which will further boost figures. JS: I think it’ll grow healthy. We’ve done some roadshows and feedback is quite encouraging that people who haven’t thought about seconds before and didn’t know they could do that, then see the opportunity. There needs to be this constant flow from people in the industry. LS: It’s still overall a relatively small percentage of the market and I think it’ll still remain a small portion but there’s room for growth and continued education. SJ: I think if there is improved knowledge and education you can make it grow. I’d suggest one thing we do with advisers which is case studies. Make it anonymous but to demonstrate to the commercial side cases lenders have done that actually worked, is great. Advisers do case studies in exams and think like that. Show them case studies whereby the first and business funding weren’t the right options but seconds was. If we don’t do something different then I can’t see the market doing anything but staying flat. 

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Loan LoanIntroducer Introducer

It’s time to start thinking like entrepreneurs I can often be found staring out of windows, or in to them as the new neighbours have begun to realise. I was on the train recently, day dreaming out of one when an email pinged on my phone. It was Eric, an old broking acquaintance and after the pre-amble of asking how things were he cut to the chase – would I like to buy his business. I can’t help but tease people and so I emailed him back and asked what business he was in. Unfortunately for us both it was, as I feared – mortgage broking. How much do you want for it? I asked and so begun a diatribe listing every reason as to why I should buy but each reason was a reason why I shouldn’t. Bless him. He means well but appears to have made the classic busy fool mistake of constantly looking down and only looking up to tell people how snowed under he is. You see, he wants to start a new life in the sun and who can blame him? What’s not to like about sun loungers, cocktails and a slower way of life. But unfortunately for Eric what he thought was an asset could actually turn out to be a millstone. Yes, I know you’ve got 600 clients, yes I known they’re loyal, yes I know you haven’t really cross-pollinated other services, yes I know there is huge potential from the Halfords opening across from your office. But Eric, tell me, what do you think your business is worth? Oh really?? £400,000 you say? But you turned over £360,000 and paid yourself £130,000. I can see a lifestyle mechanism but I’m not too sure I can see a business. Let’s be honest Eric, it’s a phone book that you’re trying to flog me, that’s what your selling, nothing more and one that is loyal to you and not the business. In some respects you’ve had good run on

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Martin Stewart director, London Money

income, I’d go so far as to say you’ve been overpaid and now you’ve got to end of the road with all the lifestyle but none of the cash. And here is the rub. Eric wants out, Eric wants a pay-off but Eric isn’t going anywhere. Our industry is like no other. That’s a good thing but it is also a bad thing. It was set up mainly to house tens of thousands of people on a self-employed basis and in doing so created the mindset of an introverted, fragmented, cottage industry. Individuals doing solitary things, building one-man empires in their own image and topping off the folly by naming the business after themselves. And it has led us to where we are today - a highly professional, highly paid industry but with brokers operating from lofts, sheds, kitchens and cafés. But our expectations are different today and we demand to be seen as equals among our peers, on a par with IFAs, solicitors and accountants. And yet we are nomadic and sporadic and too often for our own good, dogmatic. I personally wouldn’t engage with another professional if they were a one-man band operating from above the butchers on the high street. I want my professional connections to

impress me, have someone meet me in reception, have numerous partners and assistants to pick up enquiries when they are not there. I want THEIR business to have value as much as I do my own. Most importantly I want them to make me a cup of coffee, not meet me in Starbucks to buy me one. So, how much was Eric’s business worth? To him, it was priceless but to me it was worthless. Eric’s business has no residual income, it is purely transactional. His model is one dimensional, when it should me multi-dimensional. It is Eric’s mobile that rings, not the landline. Mind you, it could be worse. You might have what it takes to be a success but find yourself trapped inside someone else’s exit route. I read lots of stories saying how well management have done from a sale but I don’t see many brokers making any money. Personally, I’d like to see that trend turned on its head. You who finds the client should be the Kings and Queens of the industry. So, the moral here is... stop chasing the income and start to chase some capital. For that to happen though you need to start thinking a lot more like an entrepreneur and a lot less like Eric.

“Stop chasing the income and start to chase some capital”

MARCH 2019

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BACK FOR 2019!

THE SPECIALIST FINANCE EVENT OF THE SUMMER. Contact the team to confirm your support today.

FRIDAY 28 JUNE 2019 MADISON | ST PAUL’S | LONDON 12PM TO 4PM Matt Bond | matt@mortgageintroducer.com | 07525 456 869 Francesca Ramsey | francesca@mortgageintroducer.com | 0203 883 9017


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