Consolidating post-Christmas debt with a second-charge mortgage

The start of a new year heralds a fresh beginning for many people and the opportunity to re-evaluate and reassess some of life’s key goals.

For some, this involves making resolutions to achieve a healthier lifestyle while for others, it presents a chance to take a look at their spending habits, set some savings objectives and – importantly after Christmas – to pay off debt.

According to figures from The Money Charity, UK borrowers owed £1,845.6bn at the end of September 2023, an increase of £25.6bn on the previous year and the equivalent of an extra £481 per adult.

This increase in debt levels is unsurprising given the economic uncertainty and rise in living costs seen over the last couple of years, which has placed a significant amount of financial pressure on many UK households.

However, with the Bank of England Base Rate (BBR) remaining on hold since August and inflation falling to 4.6% in October, its lowest level in two years, there are signs that the economic outlook for the next 12 months is looking a little brighter.

As a result, clearing debt is likely to be a top priority for many borrowers as they enter 2024, and it is here that a second-charge mortgage can prove a useful tool for advisers to help borrowers achieve their goals.

In fact, every January, The Right Loan sees a noticeable uptick in enquiries and applications for second-charge mortgages from borrowers looking to use their home to help them pay off their debts.

In some cases, these borrowers want to consolidate debt they have accumulated over the Christmas period, while for others, the dawn of a new year signals the perfect time to get their finances in order and start afresh.

According to figures from the Finance & Leasing Association, loan and debt consolidation is still the biggest demand driver of second-charge mortgages, accounting for 59% of all new agreements in September alone.

With this in mind, advisers with clients starting the new year holding significant levels of debt should ensure second-charge mortgages are always top of mind when it comes to helping clients get back on track and assisting with their capital-raising needs.

For example, second-charge mortgages can prove extremely cost-effective in situations where remortgaging isn’t feasible or they don’t want to disturb an existing first-charge mortgage, enabling borrowers to access the equity in their home to clear any outstanding debts.

The fact a second-charge mortgage is taken out alongside a first-charge mortgage is also particularly useful in situations where a borrower is locked into a long-term fixed rate deal as they can keep that first-charge mortgage in place and not incur any early repayment charges for leaving the mortgage early.

Another benefit is that the funds raised by taking out a second-charge mortgage are made available quicker than with a first charge, making them much more appealing to those borrowers looking for swift access to finance.

A second-charge mortgage is often for a smaller amount and that there is no need to agree to new, potentially less preferable remortgage payment terms, also means any future increases in monthly living costs may be more manageable, particularly as any outstanding debts will have been paid off.

Advisers unfamiliar with the second-charge market, and in need of support on how the sector works, can refer their clients to The Right Loan, where one of our brokers can guide you through the process and help you find a viable solution for your client.

Not only will this present the referring broker with an opportunity to tap into another source of potential revenue, it will also leave them free to focus on the other areas of their business, safe in the knowledge the needs of their clients are being adequately met.

Sam Clark is director of The Right Retirement