A new year brings new challenges, but never in my working lifetime has the reset button over the Christmas period come with sleepless nights as it did this time.
The war in Ukraine, spiralling household costs and the expected removal of the Energy Bills Support Scheme in March will ensure the year only gets tougher for us all.
Couple this with a potential 75bps rise in the Bank of England base rate to control inflation, and a possible drop in house prices of 5%–11% in 2023, and we have what George Clooney would call, “The perfect storm.”
This sector has always found a way to be relevant
This will obviously put fear into some first-time buyers and movers, but will prick up the ears of investors and some buyers fortunate enough to rely on the Bank of Mum and Dad to support their home purchase.
Although the mortgage market survived the Liz Truss ‘ripple’, Q4 2022 was tough for this sector as lenders were forced to reprice or withdraw due to their funding models. Positive Lending, together with others, had to rewrite up to 70% of its book overnight.
It was understandable but frustrating and in some cases we had to call the client to inform them we could no longer proceed as the product had been withdrawn or repriced, where our advice had to be, ‘Don’t proceed.’
There will be plenty of opportunities to engage in 2023
At this stage you may be thinking, ‘Well, that’s no different from the challenges in the first charge sector, Paul,’ and you would be right. However, when you package second charges, some businesses also pay for all processing costs up front. One aborted survey cost can easily be swallowed but in some cases it was a few hundred surveys.
Consumer Duty
The market now embraces what we hope to be a better year, but with more regulatory change, of course!
The implementation of the Consumer Duty affects mortgage brokers in July, but the work to implement this is happening now. Businesses that act in good faith for their clients will embrace this — as I say to my team, it’s “being very good — but better” — as we challenge what we do, improve processes, demonstrate and record it, and constantly review it.
Today’s consumer is more complex and I am glad second charge lenders are more flexible
It’s not just about price. Test your product lines, service levels, price and value, and how the consumer understands the product and is supported before, during and post sale.
The challenge is clear for this sector as it continues to distance itself from the murky reputation it created nearly 20 years ago. Brokers still ask if self-certification is a thing, can you believe? The FCA is focusing on protecting vulnerable clients, and it should be seen as a privilege to do so as we have the tools and experience to know when to assist and when not to.
The Consumer Duty is a large body of work but one we should all embrace for the benefit of the sector. I am sure, once it’s fully implemented, the consumer will be the winner.
Optimism abounds
At Legal & General’s conference in January, its SmartrFit statistics were interesting: 39 million criteria searches had been recorded and an incredible 11% of them included capital raising. This will obviously be attractive if a remortgage proves possible because a product transfer does not deal with the extra borrowing. But what if the loan purpose is outside criteria for lenders?
Businesses that act in good faith for their clients will embrace the Consumer Duty
The second charge market has always found a way to be relevant — ever since 1991, when I wrote my first loan for Lloyds Bowmaker. Our maximum loan was £50,000 and the headline rate for prime clients was 9.9%. A blip was a 5% hike in rate; two blips and you were out. You could borrow for home improvements only.
Today’s consumer is more complex and I am glad second charge lenders are more flexible, offering funding solutions that may not meet the mainstream for many reasons — policy, complex income, etcetera.
In November 2022 a Finance & Leasing Association report showed the sector had arranged £1.558bn in new business in a 12-month period; an annual increase of 45%. However, this pales into insignificance compared to the £58.427bn in credit card and personal loan debt in the same period, despite this being a 9% reduction on the previous year. This is in addition to the £9.8bn in retail and online credit and over £40bn in car finance.
Never has the reset button over the Christmas period come with sleepless nights as it did this time
This surely demonstrates that consumers are still borrowing for aspirational purchases, or to survive the cost-of-living crisis.
The second charge market will assist borrowers with complex needs, which includes consolidation of credit and aspirational purchases. Some of our key lenders have seen up to a 30% rise in activity since Q4.
There will be plenty of opportunities to engage in this sector in 2023.
Paul McGonigle is chief executive of Positive Lending
This article featured in the February 2023 edition of MS.
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