Given the Bank of England’s (BoE’s) warning that millions of homeowners will experience a significant increase in their monthly mortgage payments, now is a crucial time for some to review their outgoings.
In its recent Financial Stability Report, the BoE delivered a wake-up call to homeowners by outlining what they can expect in terms of their mortgage payments in the coming years. The attention-grabbing figure that received significant media coverage was the prediction that ‘around one million homeowners will see their mortgage payments increase by at least £500 by the end of 2026.’
The BoE report provides a further breakdown of its projections. At the lower end of the scale, it forecasts approximately 2.3 million homeowners will experience payment increases ranging from £1 to £99 by the end of 2026. On the higher end of the scale, the report suggests around 250k homeowners could face an increase of £1,000 or more per month.
Falling within the middle range, approximately 700k million borrowers are expected to see an increase ranging from £300 to £399 by the end of 2026. Additionally, just under 500k homeowners can anticipate an increase between £400 and £499, while slightly over 500k can expect an increase ranging from £500 to £749.
While some households may be able to absorb this increase in costs, others may struggle and need to explore potential solutions to reduce their monthly outgoings. For those with unsecured credit, a second-charge debt consolidation mortgage could be beneficial and help improve their financial situation. By consolidating debt into a second-charge, borrowers may be able to extend the repayment period for their loans, thereby reducing their monthly outgoings and potentially avoiding falling into mortgage arrears.
According to the BoE’s recent Credit Conditions Survey, lenders are already witnessing an increase in borrower defaults; with further increases anticipated in Q3. Given the significant number of borrowers currently locked into long-term fixed rates, it is likely we are only at the initial stage of borrowers reaching the remortgage period and seeing their repayments rise.
Figures from the Office for National Statistics (ONS) reveal that 28% of mortgage holders already found it difficult to afford their mortgage payments between February and May of this year. Additionally, the BoE’s Financial Stability Report highlights a 12% annual growth in credit card lending, with 15% of adults increasing their borrowing in response to cost-of-living pressures. While borrowing on credit cards and other forms of unsecured credit may be manageable for some homeowners, it may prove difficult for others, especially considering the potential for higher mortgage payments.
In June 2023, IVA approvals of homeowners almost doubled from 7% to 13%, according to Creditfix. It estimates the average debt levels among homeowners currently stands at over £31,000 – 74% higher than the average among non-homeowners. Its figures also show the average level of unsecured debt among homeowners struggling with their personal finances has increased by almost 20% since June 2022.
With reports of homeowners cutting pension contributions and dipping into their savings to cover the increased cost of their mortgage payments, it is crucial not to overlook the benefits of a second-charge. A second-charge mortgage might be what borrowers need to get their finances back on track or help them reduce their outgoings for a period of time while their mortgage payments increase.
While a debt consolidation second-charge mortgage may not be the best option for all homeowners, it could be beneficial in certain scenarios. For example, borrowers paying a high-interest rate on multiple debts, such as credit cards or loans, or those with a poor credit score for whom an unsecured loan or remortgage would be challenging.
For borrowers who do not have a financial buffer to cover the rising costs, a debt consolidation second-charge could extend the repayment period of existing debt by consolidating it and reducing their monthly outgoings, potentially making them more manageable in both the short- and long-term.
Susan Baldwin is interim head of lending at Evolution Money
