Mortgage advisors in the United Kingdom have plenty of reasons to consider secured loans (referred to as second charge loans) and, according to the UK Mortgage Conduct of Business (MCOB) rules they must do so. This statutory regulation has just passed its first anniversary and what effect it has had on both regulated on unregulated products and services may give us pause.
One of the myths about secured loans is that this second charge market in the UK is not subject to regulation. While it is true that it is not subject to the control of the countrys Financial Services Authority in the way that the first charge (unsecured) market there is, second charge loans up to 30,000 US are regulated by the UKs Consumer Credit Act.
The federal government also has a clear system in place to deal fairly with its countrys citizen customers. Not only that -14 of the primary second charge loan lenders have formed a self regulatory market voluntary. It is called the Finance Industry Standards Association (FISA) and it has stepped in to regulate over 200 finance brokers in the UK.
The important change for both the first change and second charge loans market is not the law on its own but the push it has given the financial brokers to carefully consider all lending options before they offer lending advice to their clients.
However, the important change has not been regulation itself but the impetus it has given to brokers to look carefully at all the options available before offering advice. MCOB has helped advance financial lending research. Before the legal regulations on the industry brokers were not encouraged to consider second charge loans when their clients came to them for help finding borrowed funds and their providers.
This doesn’t mean that refinancing of mortgages are not the first step for homeowners who have equity and need capital but the second charge regulations on loans require brokers to become more familiar with each particular clients specific needs and circumstances prior to making recommendations. Before the second charge loans legislation UK finance brokers recommended refinancing as a matter of course. Now they most consider every financing option before reaching that conclusion.
This situation with regard to first and second charge loans is further complicated if the mortgage the borrower already has in place has a pre payment (also known as early redemption ) penalty attached to it. If the clients credit history has changed for the worse since the mortgage was originally signed or if the borrowers financial status has worsened the situation must be studied more closely as well.
While they might still get refinanced that could be ill advised under these circumstances. Refinancing second charge home loans is generally for the purpose of saving money. For a broker to recommend refinancing to someone whose income has dropped, or whose credit history has worsened would be to invite a higher interest rate and less pleasant terms the second time around.
The other issue that can make the determination for second charge or first charge loans is speed. Some loans can be completed in as few as 10 days, while others take many weeks. It may be, depending on the circumstances, that a client would be ill advised to wait for a better rate on a second charge loan. It may be just the opposite. The broker must determine that for her or his client.