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Mortgage View: Dangers of second charge

As the anniversary of mortgage regulation approaches, what is next on the FSA’s agenda?

Mortgage regulation has been good news for most brokers and the industry as a whole. The FSA says it will bring home reversion under its remit, which makes sense, given that lifetime mortgages are already regulated. To regulate one type of product and not another is not only confusing for the client but surely defeats the object of regulation? Instead of clearing up misunderstandings, making sure there is adequate protection and ensuring everyone knows where they stand, uncertainty only serves to exacerbate the likelihood of problems occurring.

The buy-to-let sector should also be regulated by the FSA, if only to put an end to the connection some people make between unscrupulous property investment clubs and the far more respectable BTL market.

Whether the FSA gets round to regulating BTL remains to be seen but there is another area where there is a real urgency for regulation – second-charge mortgages. If a client is forced to put up their home as security on a loan, they should have an advised sale.

If you have the misfortune to spend much time watching daytime TV, you may have been amazed at the number of ads for secured loans. Hard-up viewers need only put in a quick call to increase their borrowings. There is no credit-scoring, none of the survey or legal fees you can incur when remortgaging, and it does not matter whether you are employed or self-employed. The message is that it could not be easier, more straightforward and you would be daft not to.

But viewers might not be good at working out what the extortionate rates charged may mean for the total cost of the loan, nor fully appreciate the gamble they are taking. With the cheapest second-charge loan starting at 6.8 per cent (although 8 per cent and higher is more typical), there is the potential to make a huge financial mistake. Those who take out such loans are often driven by desperation to raise extra cash. At a time when the nation is drowning in debt, it is dangerous to have expensive credit so easily available if the client does not understand what they are getting themselves into.

If a client remortgaged, they would receive regulated advice. If they opt for a secured loan against their home, they will not get regulated advice. It is back to the old equity-release scenario, with part of the industry regulated but not the rest. Many clients will not realise they are not protected and that is when it gets dangerous. If a borrower puts their home up as security against a loan, they simply must have an advised sale. Given that many secured loan providers will lend up to 125 per cent loan to value, there is too much at risk.

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