As we head into a new year, brokers working in the mortgage industry may find themselves faced with a higher number of clients struggling to stay on top of debt repayments as the cost-of-living crisis continues to bite and the post-Christmas lull begins to hit home.
Christmas can be a financially stressful time for many people and recent research from debt charity, StepChange, shows that one in twelve (8%) people will be relying on credit to purchase goods this Christmas, with four in five (81%) of those who intend to borrow citing higher living costs as the main reason.
With the squeeze on household budgets forecast to remain well into 2023, the number of people using credit to finance basic living costs also looks set to increase, as rising inflation continues to drive up everyday living costs and household incomes fall by an estimated 7%, according to the Office for Budget Responsibility.
For those clients looking to better manage their financial affairs, taking out a second charge mortgage to consolidate debt by using the equity tied up in their property to clear or reduce any outstanding loans, may prove to be a financially astute way of raising capital.
Not only will consolidating the debt help to put them back in control of their finances by reducing the number of monthly payments, therefore making budgeting more manageable, it will also prevent those on longer-term fixed rates losing the preferential rate on their first charge mortgage by having to remortgage onto a more expensive deal.
By taking out a second charge mortgage the client will be able to capitalise on any equity held in their home following the boom in house prices over the last few years, while also avoiding having to pay an early repayment charge for leaving their first charge mortgage before the end of the term. This is a win-win situation and will allow the client to budget more effectively while simultaneously paying down the debt.
Recognition of the benefits offered by the second charge market has been growing in recent months, and the sector has experienced a surge in demand with new business volumes in October reaching in excess of 3,000 agreements for the fourth month in a row, according to the Finance & Leasing Association, representing an increase of 31% on the previous year.
Of these, 57% were used for the consolidation of existing loans, while a further 22% were earmarked for both loan consolidation and home improvements combined, proving that demand for a debt consolidation solution among borrowers remains high.
With soaring inflation and rising interest rates continuing to make remortgaging an unattractive proposition for those locked into a longer term low fixed rate deal, this surge in business volumes comes as no surprise for those borrowers looking to capital raise to pay off debts.Â
For brokers with clients also looking to consolidate debt but still locked into their current deal, a second charge mortgage may prove to be viable and cost-effective solution for raising capital to pay down the debt, while keeping their preferential rate on their first charge mortgage intact.
Jimmy Allen is broker account manager at Norton Broker Services
