Evolution Money, the second charge lending specialist, released its latest quarterly data tracker results today, highlighting an increase in second charge mortgage usage for debt consolidation purposes.
The tracker evaluates borrower types, average mortgage sizes, loan-to-value (LTV), and other information to provide advisers with insights into the suitability of second charge mortgages.
The latest iteration indicates a shift in volume and value of second charge mortgages, with a rise among borrowers opting for debt consolidation, compared to prime borrowers using loans for other purposes.
Data from December 2022 to February 2023 reveals that 70% of second charge mortgages by volume and 61% by value are for debt consolidation, while 30% by volume and 39% by value are for prime borrowers.
Evolution Money suggests that the increased activity among debt consolidation borrowers can be attributed to growing living costs and the need to pay off costlier debts, which may be subject to higher interest rates.
Homeowners are exploring second charge mortgage options as an alternative to remortgaging, which could result in increased monthly payments due to rising interest rates over the past six months.
The tracker reveals a decrease in the average debt consolidation loan amount by nearly £1,000, while the average term has increased to 138 months, and the average LTV has risen to 70%. The average value of consolidated debts has dropped from £18,322 to £17,403.
The most common use of debt consolidation second charge mortgages includes 55% of borrowers paying back a loan provider, over 34% paying a bank, and 5% paying off retail credit.
Steve Brilus, CEO of Evolution Money, said: “Once again, it’s possible to extrapolate what is happening in the wider economy from our Second Charge Mortgage Tracker, particularly when it comes to why homeowners are opting for a second charge mortgage rather than a straight remortgage, and also why we have seen a noticeable uptick in debt consolidation loans, and prime borrowers continuing to use their loans for the same purpose.
“Last year the Tracker reflected an increase in the number of prime borrowers using second charge mortgages, and while this remains steady, it’s also obvious that we are beginning to see a move back towards debt consolidation right across the piece.
“This is likely to have a lot to do with the direction of travel for interest rates. As they have risen, other forms of debt have become costlier to service, plus of course the attractiveness of remortgaging a first charge mortgage in order to release equity to potentially pay off these debts becomes less so, given the likelihood borrowers would be moving to a much higher rate.
“For those that can, it therefore makes sense to maintain the existing first charge and to look at second charge options in order to pay off those costlier debts.
“It’s also noticeable that we have seen a slight move downwards in terms of average loan amounts and again this might reflect the focus on just opting for a loan amount based on what is required to pay off the debt, rather than potentially taking a large loan, and for prime borrowers at least, using this ‘extra’ money for different purposes not just debt payments.
“Certainly, it has been a busy start to the year and we fully anticipate that seconds will continue to be in demand over the course of 2023 and beyond. Rates look unlikely to come down significantly in the short-term and there is a real possibility they will go up further.
“In that scenario, paying off debts – which are likely to be costing even more – with a second-charge mortgage becomes an even more attractive option and it is certainly a product that advisers should have in their advice kit bag.”
