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Second charge for debt consolidation rises

Second-charge products, by both volume and value, are more likely to be required by debt consolidation borrowers, rather than prime borrowers, according to the Evolution Money quarterly data tracker.

Looking at its total lending data for the last three months, up until the end of November 2021, the product split by volume of mortgages is 77% debt consolidation/23% prime, and by value 67% debt consolidation/33% prime.

During the previous two quarters covered by the tracker, lending by volume to prime borrowers had been around 10% higher than this quarter, and there was a more even split between debt consolidation and prime.

For those borrowers specifically using a second-charge mortgage for debt consolidation purposes, the average loan amount has increased just slightly to £21,448, with an average term of 123 months, and average loan-to-value (LTV) also increasing to 73.9%.

Borrowers, on average, continued to consolidate five specific debts, however the average value of the debts consolidated increased to £15,358.

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For prime borrowers, the average loan amount has also increased up to £35,215, with an average term of 153 months, and an average LTV also increasing to 72% from 69%.

Prime borrowers are typically taking out these second-charge mortgages again for debt consolidation (55%), home improvement and some consolidation (23%) and home improvement (18%).

Borrowers were also utilising second-charge loans to pay for vehicles and to fund existing business ventures. The average number of specific debts being consolidated by prime borrowers has remained at five, and the average value of the debt has increased again to £23,160.

Steve Brilus, chief executive of Evolution Money, said: “Second-charge products have always been used by homeowners for debt consolidation purposes, however in previous iterations of the tracker we were starting to see a growing number of prime borrowers using seconds for purposes which were not purely to pay off debts.

“This time around however, it’s clear there has been a shift back in favour of debt consolidation and this is likely to be fuelled by the data coming from a period when government support was being removed, particularly with regards to furlough, and the fact that many people who had accumulated debts during the pandemic were looking for solutions to pay those more expensive debts off.

“This may be why we’ve seen an increase in both loan amount and the average value of debts consolidated by both debt consolidation and prime borrowers, and why LTVs have moved upwards.

“We should not underestimate the benefits that debt consolidation can provide and with second-charge rates likely to be much lower than many other forms of debt, it makes perfect sense for some homeowners to take out a second-charge and pay off their more expensive debts first.

“It’s likely that as we move into 2022 debt consolidation will continue to remain the number one reason for taking out a second-charge mortgage, however we should not rule out more prime borrowers requiring these products especially if they were able to secure an ultra-competitive first-charge rate over the last 12 months, but still find themselves with a requirement to access further equity.

“2021 was a very strong year for the seconds market, and we certainly believe 2022 will be the same. This is a growing sector of the market which advisers should be active in to help those clients with these specific requirements.”

By Jake Carter

Source: Mortgage Introducer

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House price jumps make second charges a compelling debt consolidation option

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.

To find out more about how we can assist you with your Second Charge Mortgage please click here

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.


Source: Financial Reporter