Christmas is always an expensive time of year, but with the rising-cost-of-living placing significant financial pressure on UK households this winter, many consumers may find they have less money to spend on presents and the usual festivities than in previous years.
Energy bills are rising, inflation continues to creep up and the increasing cost of everyday staples such as bread, milk and eggs means more people than ever before are ending the year watching the purse strings and reining in spending.
This increase in cost for everyday goods is also driving up debt levels among consumers, with a growing number of borrowers turning to credit to cover the cost of their outgoings, particularly over the festive period.
According to a recent survey from debt charity, StepChange, 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 cost of borrowing only set to rise further and the squeeze on household budgets likely to continue as we head into a new year, the number of people looking to better manage their finances by taking out a second charge mortgage to consolidate their debt also looks set to increase, as borrowers seek to find ways to better manage their financial affairs.
In fact, figures from the Finance & Leasing Association shows that the growth of the second charge market is being driven primarily by debt consolidation, with 57% of new agreements in September alone used to consolidate existing loans, while a further 22% was for both loan consolidation and home improvements combined.
For some borrowers, taking out a second charge mortgage for debt consolidation purposes can make perfect financial sense and may prove to be a more financially astute way of raising capital, as those on longer-term fixed rates may be reluctant to remortgage given the fact that successive interest rate increases mean they would likely move on to a more expensive deal.
Some borrowers may also face a hefty early repayment charge for leaving their first charge mortgage before the end of the term, therefore a second charge mortgage can serve their needs very effectively by enabling them to capitalise on any accrued equity in their home following the boom in house prices throughout the pandemic.
This prevents the need to sacrifice the preferential interest rate on their first charge mortgage and instead use a second charge mortgage to unlock the equity in their homes which can then be used towards clearing or reducing existing debts. It may also help them to better manage their finances by reducing the number of monthly payments outstanding, making budgeting more manageable.
For brokers with clients struggling with debt repayments or for those simply looking to free up a bit more cash every month to combat the squeeze, it may be worth considering consolidating the debt by taking out a second charge mortgage and borrowing against the equity in their home.
Second charge mortgages can prove to be a useful tool in cases where remortgaging isn’t feasible or the best advice for their current circumstances, as they offer a cost-effective way to raise finance for debt consolidation and hopefully put them back in control of their finances and help to alleviate some of the pressure faced by increased living costs.
David Binney is head of sales at Norton Home Loans
