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Secure business

Secured loans (or second charges) seem to be something of a pretender to the throne of traditional home financing. Perhaps this is due to a lack of understanding in the market of the differences between these and unsecured loans or perhaps it is because mortgage advisers are simply not used to including them as an option in a review of financial products.

What is clear is that the growth of these loans is significant and that the main thrust is coming from direct consumer propositions.

The investment from the direct sector to saturate clients with product offerings means that barely an evening goes past without a plethora of adverts offering the opportunity to “buy the car you&#39ve always wanted” or “take that dream holiday”.

I recently heard that one company targeting consumers spends £1m a month on advertising. Obviously, very few companies, let alone mortgage brokers, could afford to compete with this but business can be obtained on the back of the expenditure of others.

One of the reasons that over half of the mortgages in this country are arranged via a professional adviser is because of the sheer number of choices available. Quite simply, the muddier the water, the greater the need by borrowers for a professional adviser to steer them through it.

So, should mortgage advisers add secured loans to their product armoury? This sector is one in which brokers need to make more of a mark. The goal waiting for you is simply that the sales process is shorter which means a client&#39s needs are satisfied faster and your commission is paid sooner.

Secured loans are simply a loan secured against a property. As the name suggests, the loan is in addition to current mortgage arrangements. It is classified as secure rather than unsecured simply because the property offers the lender some collateral even if they only have the second claim.

The growth of secured loans can possibly be attributed to the speed and simplicity of processing the loan.

Unlike the myriad of complications associated with traditional mortgages that contribute to making moving house the most stressful thing that we do, secured loans are usually turned around within a matter of days rather than weeks or even months.

A traditional way of raising capital would be via a remortgage but even these take typically an average of six to eight weeks.

If there are no complications to a secured loan case, the overwhelming majority are accepted on first sight. Furthermore, more than eight out of 10 cases carry on to completion and are paid out.

In what situation would you reach for the secured loan rate sheet rather than review remortgage options? There are many cases where the client requirements go beyond simply raising finance. If a client&#39s priorities include speed and lack of up-front costs then a secured loan may well provide a viable alternative to remortgaging.

Additionally, these loans are flexible in terms of criteria, with most companies looking for a reason to say yes, not no. Clients with poor credit history have a quick and painless alternative to obtain additional finance.

In the past, rates have been such that they were primarily used as a short-term “fix”. Obviously, lenders are still pricing to accommodate their increased risk exposure but with interest rates at a 40-year low, even secured loans are comfortably affordable and allow clients to release equity in their homes up to 100 per cent loan to value.

A frequent hurdle that advisers need to scale is the lack of resources for up-front costs. With no requirement for survey and admin fees, solicitors&#39 costs or even a redemption penalty on the existing mortgage, secured loans remove this barrier.

The use of a secured loan is typically used for more luxury or unique family items. It may be that your clients are committed to a holiday of a lifetime, home improvements, a new car or next year&#39s school fees.

Another common use for secured loans is debt consolidation. This is often motivated by speed of access to funds and reduction in monthly outgoings but a secured loan also suits clients who may be worried about suggesting to their own mortgage lender that they are having financial difficulties.

For such a simple product, there seems to be confusion over when it is appropriate to recommend a secured loan.

This product is driven by positive client needs. With house purchases, it is typical to work out how much you can afford and then search for a home in that price range.

With secured loans, the client requirement is usually based on a specific amount and falls within specific deadlines.

Why should every adviser include secured loans in their product armoury?

If the client requiring finance has redemption penalties on their first mortgage, as most do, then secured loans should be considered. The subject of the mortgage indemnity guarantee can also play a part in boosting up-front costs to an unacceptable level. Secured loans should be targeted to specific needs.

A further example of the use of secured loans could be when the client has a large county court judgement or default, requiring funding from a specialist lender, especially if the existing mortgage is with a high-street lender. It may be more appropriate to offer a secured loan as opposed to remortgaging the whole debt at a loaded rate.

Where commitments on debt such as credit cards or unsecured loans has resulted in increased monthly commitments – it may be possible to reduce monthly outgoings to a more manageable level but without remortgaging for a further 25-year term. It is clear that some clients want to see a shorter end-date on some element of their overall debt position.

Finally, just like the remortgage can open the door for other complementary products, so can a secured loan but within a far quicker timescale.

When recommending complementary insurance or investment products, it is usual that a client simply cannot afford to stretch their monthly outgoings.

In steps, a secured loan can be used to reduce overall monthly outgoings and the client has the option to select ancillary products, perhaps to offer greater security for their families with no increase in the monthly bill.

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