As we head towards the end of the year, many advisers will be hearing from clients who want to get to grips with their debts. The run-up to Christmas often coincides with borrowers taking a step back from their finances, recognising they would like to be paying less for their various forms of credit, and investigating their options for consolidating those debts together into a single monthly payment.
Clients who want to consolidate their debts will have a few options if they want to make use of their property asset, but it’s important for advisers to consider all of those possible solutions rather than simply the one they are most familiar or comfortable with.
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Remortgaging for debt consolidation
One option will be remortgaging, taking out a larger loan so that they can clear all of those existing debts on credit cards, personal loans and the like. They then have just one debt to keep on top of, their mortgage.
It’s certainly a simple option – there will only be one repayment date to monitor, one interest rate to be aware of. But there are a couple of potential downsides that come from the remortgaging route.
The first, and potentially most punitive, is the risk of having to pay an early repayment charge. Advisers don’t need me to tell them that the vast majority of their clients are likely to be on fixed-rate mortgages these days, and more often than not they are lengthy ones. Given the way ERCs are calculated as a percentage of the outstanding mortgage balance, they can easily become a considerable cost if your client happens to be only halfway through a five-year fixed rate. That’s an exit fee that is really going to sting on the way out.
That’s not the only financial hit that comes from remortgaging either. Your client will also have to switch rate too. That’s not a bad thing if they happen to be on a poor deal but given the level of competition we have seen in recent years there’s a real risk that they will have to move to a less attractive rate, particularly if the additional borrowing moves their loan into a higher loan-to-value band. As a result, remortgaging in order to clear those additional debts may mean that not only does the client have to hand over thousands in ERCs, they also move onto a higher interest rate, with a more substantial mortgage balance to boot.
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It doesn’t have to be like this
There is a clear alternative though, in the form of a second charge mortgages. And not only does a second charge offer a different route for borrowers, it actively avoids some of those potential downsides that come from remortgaging.
It’s worth emphasising the fact that a second charge mortgage is secured against the equity the borrower holds in the property. As a result, the original mortgage is unaffected by the loan. That means no concerns over exit fees, moving LTV bands, or shifting interest rates – the client can carry on as usual with that first-charge mortgage, and continue to benefit from the excellent rate that you secured for them.
A second charge stands separate from that original mortgage, meaning there is no unpleasant knock-on effect from raising the sums needed for the debt consolidation.
Rising equity levels
It’s impossible to ignore the considerable growth in house prices that have taken place over the past year or so, off the back of the stamp duty holiday. That tax break has caused huge numbers of would-be buyers to take the plunge and pursue a move, and it’s driven up prices across the board.
In fact, the latest figures from the Office for National Statistics show that the average property price jumped by a massive 10.6% in the 12 months to the end of August, meaning a new average price of £264,000. To put that in cash terms, that’s a rise of around £25,000 compared to a year ago.
And that’s really good news for any borrower considering a second charge for debt consolidation purposes. That price growth means they hold far more equity in their property, and so are better positioned to raise the funds needed in order to clear those debts.
The demand for help with debt consolidation is only going to grow in the months ahead, so it’s important that advisers keep on top of the full range of options open to their clients. If they aren’t comfortable dealing with second charges themselves, then now is a good time to find a second charge specialist to partner with who can help their clients find the best possible funding solution.
By STEVE BRILUS
Source: Financial Reporter