The UK Mortgage Conduct of Business (MCOB) says that mortgage advisors must look into secured loans, which are also called second charge loans. There are many good reasons to do this. This law just turned one, and we may want to take a moment to think about how it has affected both regulated and unregulated products and services.
One common misconception about secured loans is that the UK's second charge market is not regulated. Even though it is not regulated by the country's Financial Services Authority like the first charge (unsecured) market is, second charge loans of up to 30,000 US dollars are governed by the UK's Consumer Credit Act.
There is also a clear system in place to make sure that the federal government treats its citizens fairly. Not only that, but 14 of the main lenders of second charge loans have set up a self-regulatory market on their own. The Finance Industry Standards Association (FISA) is in charge of regulating more than 200 finance brokers in the UK.
The important change for both first charge and second charge loans isn't the law itself, but the way it has pushed financial brokers to think carefully about all of their clients' lending options before giving them advice.
But the most important change hasn't been regulation itself. Instead, it's the fact that it has pushed brokers to carefully consider all their options before giving advice. Research on lending money has been helped by MCOB. Before the government put rules on the industry, brokers did not advise their clients to look into second charge loans when they asked for help finding money to borrow and a lender.
This doesn't mean that refinancing a mortgage isn't the first step for homeowners with equity who need cash, but the second charge regulations on loans mean that brokers have to learn more about each client's needs and situation before making suggestions. Before the law about second charge loans was passed, UK finance brokers always suggested that their clients refinance. Now, they have to think about all of their financing options before making a decision.
When it comes to first and second charge loans, things get even more complicated if the borrower already has a mortgage with a prepayment (also called "early redemption") penalty. Since the mortgage was signed, if the client's credit history has gotten worse or if the borrower's financial situation has gotten worse, the situation needs to be looked at more closely.
Even though they might still get refinanced, it might not be a good idea in this case. Most of the time, people refinance second charge home loans to save money. If a broker suggests refinancing to a person whose income has gone down or whose credit history has gotten worse, that person could end up with a higher interest rate and less favourable terms the second time around.
Speed is another thing that can make the difference between second charge and first charge loans. Some loans can be paid off in as little as 10 days, while others can take as long as several weeks. Depending on the situation, it may not be in the client's best interest to wait for a better rate on a second charge loan. It might be the other way around. This is something the broker must decide for the client.
