ESIS applies to second charge mortgages from 21 March 2016 and will eventually replace Key Facts Illustration (KFI), de facto first charge disclosure document, by March 2019. The information in the ESIS will be similar to KFI, but with a different order and wording. It will also include two annual percentage of charges (APRCs). The first is based on the current interest rate, plus reversionary rate, unless the product is fixed for the duration of the loan; the second is based on the highest borrowing rate over the previous 20 years.
Without question the introduction of improved disclosures has strengthened consumer protection; consumers can now clearly disseminate all fees at various stages of the loan cycle and understand the premise for charges.
In addition, intermediaries now have to disclose exactly what service they provide so consumers can make informed choices when seeking advice.
The application and appropriateness of second charge mortgages have not changed as a result of MCD regulation. In essence, secured loans are appropriate when a capital raise requirement exists and remortgage or further advance will trigger a cost or loss of interest rate and total overall cost in comparison for a second charge mortgage is lower over a defined term (usually until cost of remortgage ends).
Avoidance of first charge early repayment charges and desire to keep low rates of interest are still the key drivers to explore a secured loan. What has improved the relevance of secured loans is downward movement in interest rates and fees. Fees have improved as a result of MCD – changes in distribution and packager risk creating a more competitive and transparent landscape, as described earlier. In order for secured loans to remain relevant it is important for overall costs to reduce as this acts to alleviate tightened affordability tests.
Chris Fairfax is managing director at Positive Lending
Key points
Prior to the introduction of Mortgage Credit Directive (MCD) on 21 March 2016, second charge secured loans were regulated as consumer credit.
Post MCD, fee charging has parity with the first charge market.
Avoidance of first charge early repayment charges and desire to keep low rates of interest are still the key drivers to explore a secured loan.
