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Second charge fees: cheap deals are not always the best for the customer

By Paul Woodworth, managing director of Gateway2Finance |


 This week, my car has had to go into the garage for some repair work. Someone hit it in a car park and drove off, or so my wife says.

This week, my car has had to go into the garage for some repair work. Someone hit it in a car park and drove off, or so my wife says.

Anyway, as a result I had to hire a car for a few days, which believe me is not as easy as it sounds. The car rental companies, like many industries, vary their commercial models. Having spent 20 years working in Yorkshire, I have acquired the local’s attitude towards thrift. So like any good Yorkshiremen, I simply went for the cheapest.

What a mistake!

-    First, I was kept waiting for half an hour while the car was delivered from another depot, and then it wasn’t cleaned properly as they’d been in a hurry.
-    Then there were the additional options – I was advised that the insurance had an excess of £1,000, but I could reduce this by paying an extra £15 per day, which didn’t include the extra cover for windscreen and small scratches etc.

Suddenly, what looked like the cheap option, was working out to be quite expensive, but it was too late to find an alternative.

When I arrived (late) for work, I opened an article about second charge mortgage fees and how they vary throughout the market. Good, I thought, here is a perfect opportunity for the industry media to provide a fair and honest appraisal of fee structures.

Unfortunately, the opportunity was missed and as always the article listed a very broad analysis of top-line fees with no rational as to how they were calculated, what they covered and how they are distributed.

At this point, I think it is probably worth mentioning that the majority of cases referred to second charge brokers tend to be slightly more complex than the prime, vanilla-type mortgages of which hundreds are submitted to mainstream mortgage lenders on a daily basis. Many of the cases submitted to second charge brokers are slightly more challenging. Typical scenarios include debt consolidation, clients who have had varying financial difficulties, deposits on second properties or those with irregular incomes to name just a few.

So straightaway there is a need to manage expectations as more complex cases will obviously be more difficult to deal with. Also, many mortgage intermediaries appear to believe that as the first and second charge rules are the same, then the process is also the same. This simply isn’t the case, and is a topic for another day.

Second charge brokers have undergone a period of massive change in the past two years. The change of regulatory regimes, initially from Consumer Credit Act to Financial Conduct Authority (Consumer Credit Sourcebook), then to mortgages (Mortgage Conduct of Business) following the implementation of the Mortgage Credit Directive, while trying to put together a sustainable business model has been a challenge for us all.

So, back to the fees…

Fees are certainly a major concern and are probably the biggest barrier to mortgage intermediaries utilising second charge mortgages as a viable option within their product portfolio.

Remember, the purpose of this comparison is not to justify or criticise any fee structure, merely to demonstrate that simply quoting a fee amount charged by a master broker is not necessarily a fair representation of their earnings.

Below are two typical models, neither is exact, but they are close enough to demonstrate the point. For this purpose, I have looked at a £30,000 advance (remember we are in Yorkshire).

 

Typical Basic Fee Model

10% Fee Model

Packaging Fee

£1,000

£3,000

Valuation Fee

£300 (paid by customer)

£300

Consents and or BSQ

£100 (paid by customer)

£100

Net Income from Fees

£1,000

£2,600

Intermediary

£495 (paid by customer )

£1,300


Here, the master broker charging the 10% fee is open to a great deal of criticism, especially at first glance when you look at the income of £1,300 compared to £1,000 on the basic fee model. However, when the fees are broken down: 
 

 

Typical Basic Fee Model

10% Fee Model

Upfront Fee paid by the customer

£895

Nil

Mortgage Intermediary Income

£495

£1,300

Master Broker Income

£1,000

£1,300

 

 

 

 

 


Note also

In the 10% fee model, the master broker takes all of the risk with regards to abortive costs. So should the property be down valued, the second charge broker has done all of the sales and underwriting work and absorbs an additional £400 in costs. There is also the issue of the interest on the fees. However, in many cases the customer will increase a loan amount to reimburse their own costs.

The majority of second charge brokers welcome the demise of the typical 10% fee model as it is recognised that this essentially funds the abortive costs of the cases that do not proceed to completion.

We should all work towards reducing fees, while maintaining a service that customers and mortgage intermediaries can trust. In the meantime, it is important that fees are transparent in order for customers and mortgage intermediaries to be fully aware of exactly how the fee is structured and distributed.



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