Debt consolidation and better financial management are hot topics at the start of every new year.
This is especially true for those borrowers who may have overspent during the festive season and find themselves with increased debt and higher credit card bills in January.
Tougher economic conditions, increased living costs and a higher interest rate environment have presented challenging conditions for many borrowers over the last few years, leading to increased spending and less disposable income for homeowners and businesses alike.
As we head into the new year, therefore, brokers may find themselves increasingly tasked with helping borrowers navigate financial challenges and in search of solutions to repay any outstanding debt they may currently hold.
Whether this is spread across multiple credit cards and personal loans or as a tax bill or small business loan, getting the debt under control is likely to be a key priority for many borrowers as we head further into 2025.
Using the tools available
The use of second charge mortgages as a capital raising tool to repay and consolidate debt has become increasingly commonplace in recent years, with heightened awareness and a higher interest rate environment, serving to extend the product’s reach.
Increasingly, more brokers and borrowers are beginning to understand the benefits offered by second charge mortgages, particularly when it comes to speed and flexibility.
Unlike standard mortgages, regular completions on a second charge can often be achieved within a week, providing borrowers with the capital they need quickly and efficiently.
This has made the product an increasingly popular tool for consolidating debt, with almost 59 per cent of all second charge loans taken out in October 2024 used for this purpose, according to figures from the Finance & Leasing Association (FLA).
Consolidating debt using a second charge mortgage can help borrowers get a handle on their finances by reducing multiple monthly outgoings into one single payment.
It can also prove a useful stop gap for those borrowers who are currently tied to a mortgage with early repayment charge penalties and competitive rates.
On the right foot
While the uptick in demand for second charge mortgages is certainly a boon for both the sector and wider specialist lending market, one of the many questions Norton Broker Services often receives regarding applications relates to the documentation required for debt consolidation purposes.
Given the speed at which a second charge mortgage can be completed, having the right documentation in place from the outset makes sense and can ensure the process remains as seamless as possible for the borrower.
In all cases, the settlement figures for any existing loans are essential and must show the exact amount required to clear the outstanding debt.
This includes details of any fees or charges associated with paying off the debt early.
Recent statements showing outstanding credit card balances and other unsecured debt are also essential.
These must be the most current and up-to-date statements available and typically cover the last three months.
Proof of existing payments in the form of bank statements or direct debit confirmation is also important as these demonstrate that the borrower has continued to make regular payments to clear the debt being consolidated.
Highlighting the annual repayment rates (ARR) for all credit liabilities is also essential as this enables specialist brokers like Norton Broker Services to identify the true cost of the debt.
This will ensure the best advice is given to the client and identify whether consolidation will actually result in genuine cost savings for the borrower.
As with all aspects of the advice process, thorough due diligence is crucial when trying to determine whether a second charge mortgage is the best outcome for the needs of the client.
Having all the facts to hand will enable us to quickly determine whether the client meets the affordability requirements for the consolidated loan.
It will also allow us to identify whether a second charge mortgage is actually the best capital raising solution for your clients’ needs.
Eddie Lau is broker account manager at Norton Broker Services
