A fall in disposable incomes means homeowners may start to look at their borrowing options to pay for purchases their savings would otherwise have covered.
The rapid withdrawal of products in the first charge mortgage market and subsequent repricing of rates, coupled with the cost-of-living crisis, will see a significant reduction in the disposable income of millions of homeowners coming to the end of their fixed-rate mortgages.
At the start of September, prior to the market turmoil, UK Finance warned in its Q2 Household Finance Review, that 1.3 million homeowners set to refinance this year would face an 11% reduction in their disposable income – a figure that will be considerably more now.
There is already evidence that some borrowers are cutting down on their spending. Nationwide’s Spending Report showed overall spending in August – usually one of the biggest months in the year for spending – totalled just over £8.3bn, down 1% on July. Given the expected rise in outgoings for some borrowers, this could fall further.
The need and desire to buy and pay for items such as cars, weddings and even holidays remains however, particularly for prime borrowers, and when faced with a lack of savings, they could look to other finance options.
We are already seeing an increase in the use of second-charge mortgages by prime borrowers and we expect this to continue. Our latest quarterly tracker shows between June to August 2022, prime borrowers accounted for 32% by volume and 41% by value of all our second-charge lending – both up 1% on the previous three months.
When we look at what prime borrowers are using second charges for, debt consolidation makes up 63% of all borrowing, up from 58.2% in the previous three months, followed by home improvement and some consolidation at 26.5% and home improvement 21%, up from 16.8%.
It is interesting our data shows an increase in prime borrowers taking out second charges to cover home improvements, given widespread reports that the cost of living crisis is making homeowners hold off on home improvements. The rise we are seeing however could perhaps be explained by borrowers utilising a second charge where once savings – and disposable income – would have covered the cost.
It could also be that instead of an actual overall rise in demand for home improvements, borrowers are opting to use a second charge for such costs, instead of a remortgage or further advance.
Borrowers who tied into a mortgage deal over the last few years will be even more reluctant to disturb their first-charge rate given the recent stark rises in product rates.
While rates are also rising in the second-charge market, for those tied into a five- or ten-year fix and wanting to access the housing equity they have potentially built up over the last few years, a second-charge could prove to be a viable short-term option. This may also avoid paying Early Repayment Charges (ERCs). Our tracker shows the average prime borrower borrows £36,377 on average over 154 months at an average LTV of 66%.
As well as borrowers accessing seconds for bigger purchases, we are also continuing to see strong demand for debt consolidation among prime borrowers – something that we’re likely to see increase given the tight squeeze on borrowers’ incomes.
Borrowers who may have borrowed through the Covid period, may have been comfortably paying back their debt repayments each month but may now need to consolidate and firm up their payments considering any increased outgoings.
Our data shows the average number of specific debts being consolidated by prime borrowers remained at five, however the average value of the debt had continued to increase; this quarter up to £24,732.
As the UK economy and mortgage market continues to fluctuate, regulated and accessible forms of finance are going to be essential to advisers and clients. For those with equity in their property, a second charge could prove to be a strong short-term option.
Kerri Pender is operations director at Evolution Money
