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Sub-prime time

Of the total working population, imagine 8.7 million (roughly one in four) of them feeling disenfranchised from home ownership and with nobody to talk to about their needs.

According to Datamonitor, 25 per cent of the working population fall into what is variously described as sub-prime or non-conforming.

Definitions abound as to who or what is sub-prime – perhaps anybody who is not prime is the simplest solution.

Prime more or less covers all those who can walk into a high-street lender and walk out with a mortgage – around three in four.

Sub-prime covers everybody from the recently self-employed to those with mul- tiple jobs or contract workers to discharged bankrupts, credit repair and buy to lets or combinations of the above.

Just consider some of the facts.

By 1997 there were just under eight million County Court judgments registered and outstanding In 1998, over 2.5 million people had arrears on their mortgage account 6.5 million people do more than one job a day.

Almost eight million people work on a contract basis.

Of the estimated eight million people categorised as sub-prime, one in three either has a mortgage or owns their property outright.

What is key is that it represents a great marketing opportunity for IFAs. Still not convinced? Take this case recently submitted. A married couple had been declared bankrupt in 1992 during the last recession, which they discharged three years later.

Late last year, they found themselves in a position to buy back their beloved house in Kensington which they had to sell back in 1992. Purchase price £500k, £200k deposit, mortgage required £300k. They had made good once again with provable income to service the loan size, felt confident of obtaining a high-street mortgage – but no chance.And this is one of the easiest lending decisions we have made. A higher risk should not be mistaken for a bad risk.

So not only is the market size substantial, it is also largely untapped. The traditional lenders to date have shown no appetite for this business. Add to the equation that there is no stakeholder-type straitjacket on mortgage commission – in fact, quite the opposite – and it all adds up to a great business opportunity.

But, and it is a big but, all this is set to change. Over the last five years, the sub-prime sector has lent to 100,000 borrowers – to such an extent that the traditional lenders are now waking up. In fact, it is your wake-up call as well. Smell the coffee – if you do not act soon, then you will lose this market as well.

Either through acquisition (of a sub-prime lender) or referral schemes to sub-prime lenders or developing the products internally, the mainstream lenders are now looking at how they can stick their thumb into the hole in the dam that the one in four applicants they turn away represents.

Remember, we are talking about the working population with disposable income, who, for whatever reason, do not fit the traditional mould. The rewards can be plentiful. Putting aside the actual pro-curation fee from the lender for a moment, look at the other earning potential.

According to research by Zurich IFA Group Mortgage Network (a complete mortgage service aimed at IFAs), there is some reasonable commission still available.

Average commission per mortgage combining sales of term insurance, critical-illness cover, PHI and redundancy insurance.

House purchase – £800 plus lender&#39s procuration fee

Remortgage – £450 plus lender&#39s procuration fee

Source: Zurich IFA Group Mortgage Network

In addition, for absolutely no work at all, an IFA can earn £100 just by introducing a client to Zurich IFA for their general insurance.

Then take a look at the procuration fees available from lenders in the sub-prime sector. On average, an IFA will receive a 1 per cent fee from the lender – combine that with the commission available and it all adds up to a reasonable figure (over 2 per cent of the loan size).

The procuration fee on a typical sub-prime loan of £60k is therefore £600 – compared with the £150 to £200 an IFA would earn from a mainstream lender.

There is another option. If an IFA is seriously looking at other product options and has had enough of compliance and related costs as well as the general squeeze on commission from the stakeholder fee regime, then take a look at the fastest growing section of the mortgage market over the last five years.

Just imagine – you do not have to sit in front of the client, there is no FSA requirement to justify a product recommendation, there is no mortgage code requirement to even subscribe to it, there is no requirement (and this is the best bit) to disclose any of the fees that you receive from a lender (unlike being an IFA under the mortgage code).

But, of course, this sort of Utopia does not exist and. even if it did. then surely the qualifications would be stiffer than FPC?

Well it does exist and the total requirement from a regulatory point of view is one piece of paper – a consumer credit licence. What am I talking about? Why mortgage middlemen or packagers.

Here is how you do it. Set up your own subsidiary so you have your existing business “Mr Smith the IFA” but you set up “Mr Smith the mortgage packager”.

You then get the lender to pay the procuration fee to Mr Smith the Packager (and most will fall over backwards to help – remember the mortgage market is oversupplied at the moment – look at the price war raging now) which can operate under the position described above.

Forget the 1 per cent procuration fee – you are now looking at an average of 2.5 per cent to 3 per cent of the loan size. In other words, on the £60k example above, instead of earning £600, how does £1,800 grab you?

And, of course, you know you can get away with it because there is no requirement under the mortgage code to disclose the fee – even if the client asks via his IFA. Go on, give it a try, you know you deserve it.

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