Borrowing in a Debt Management Plan

Debt levels among UK consumers are on the rise as rampant inflation, soaring energy prices and stagnant wages continue to squeeze the household budgets of millions of people across the country as the rising cost of living continues to take hold. 

This trend is likely to increase even further as inflationary pressures push interest rates higher and the war in Ukraine continues to drive food and energy prices upwards.

For consumers already faced with debt, such as those in Debt Management Plans (DMPs), the increasing cost of everyday essentials is worrying and holding a DMP may raise further concerns about the impact these debts could have on their future credit scores and potential borrowing capacity. 

However, the specialist mortgage market has been helping those affected by debt and adverse credit records for years and prides itself on providing cost effective and tailored solutions to help those affected by debt repair their credit rating history, including those holding DMPs.

DMPs are an informal agreement between debt holders and their creditors relating to the paying back of non-priority debts such as credit cards, loans and store cards. They work by outlining the set monthly payment to be paid back every month, which is then divided between creditors.  

But because DMPs are considered to be an informal agreement, they are therefore, not legally binding so the borrower is not tied into the deal for any fixed period of time. This means they are free to cancel or clear the agreement whenever they choose, including before the debt is fully repaid.

For homeowners holding a DMP while simultaneously sitting on equity in their home, tapping into this wealth by taking out a second charge mortgage could help them overcome the financial challenges they are facing and help to get them back on track as it will allow the borrower to access a lump-sum to clear the DMP while keeping the current mortgage intact.

This is a wise move in the current volatile interest rate environment, particularly for those at the start of a fixed rate term as moving to a higher rate may only exacerbate the situation further. Instead, the second charge loan can be taken out in addition to the first charge mortgage, with the money used to clear the DMP, carry out renovations or even pay other debts such as tax bills.

While in the majority of cases, a second charge mortgage would be used to pay off a DMP, there are also instances where if it is the advisor’s best advice to keep the client’s DMP in place, Norton Home Loans would still lend to that client. All we need to know from an affordability perspective is the actual figure being paid into the debt rather than the full details of the DMP itself. 

So, if someone is paying £100 a month into a DMP, then that outgoing amount is the figure we need to know about in order to calculate their borrowing capacity. This can then determine if they are eligible for a second charge mortgage and how much we are willing to lend.

For brokers with clients looking to free up a bit more cash every month to combat the squeeze they are currently facing, but are concerned about the fact that they hold a DMP, recommending a second charge mortgage that will allow them to borrow against the equity in their home while also paying off their debt may well be a suitable option. 

David Binney is head of sales at Norton Home Loans