There has been no shortage of financial difficulties faced by those across the UK over the last few years. The pandemic has been followed in short order by the cost of living crisis, meaning many of us are having to work harder to make our money stretch sufficiently to cover our regular spending.
Perhaps understandably, these challenges have resulted in greater numbers of households turning towards unsecured forms of borrowing. Our recent Specialist Lending Study with YouGov revealed that around one in three (33%) of those with adverse credit have increased the amount of unsecured debt they have over the last 12 months.
This increase has been particularly pronounced when it comes to buy now pay later schemes, where 40% of those with adverse credit have reported increased usage in the last year.
However, this additional debt burden is weighing heavily on those borrowers. Our study found that more than a third (37%) report that their financial situation is having a negative impact on their mental health.
Getting those debts under control, for example through debt consolidation, can make a huge difference. Simplifying that debt burden into a single repayment makes life a lot more simple – there’s only one repayment date to remember, after all – but can also dramatically reduce the cost of repaying that debt, by moving that unsecured debt and securing it against an asset, like a property.
As a result, this drive towards debt means that ever greater numbers of homeowners would benefit from the guidance around debt consolidation options from quality mortgage brokers.
Remortgages vs second charge mortgages
One option for those looking to consolidate their debts is to make use of the equity they hold in their home. In fact, given the incredible rate of house price growth that we have seen in the last few years, many of those homeowners are now in possession of far greater equity stakes than when they last took out a mortgage.
For some, remortgaging will make sense, particularly if they have a mortgage coming to an end soon. There are plenty of borrowers in this position, with industry figures stating that as many as 1.8 million fixed rates will be reaching the end of their fixed term in the coming year.
But if the customer is in the middle of a fixed rate – say in the second year of a five-year fixed term – then remortgaging can be a hugely expensive move. There’s a significant early repayment charge (ERC) to pay, as well as the likelihood of moving to a much higher rate than they currently enjoy. This rate rise will only be exacerbated if their higher borrowing requirements mean they move into a higher LTV tier.
Second charge mortgages offer an excellent alternative for borrowers in this position. The original mortgage is completely untouched, meaning no ERCs and no painful rate rise. They can carry on as usual with their existing mortgage repayments.
Instead, the second charge is borrowed against that equity stake, a completely clean second mortgage product which can be handled separately, allowing the customer to raise the funds needed to consolidate those loans at a much more competitive rate than they are likely already paying.
Educating customers
Brokers will no doubt already be hearing from customers who want to explore their options when it comes to consolidating debts, to get a better grasp of the different ways they may be able to utilise the equity held in their property in order to get their finances on a more solid footing.
However, there will be plenty of existing customers who have no idea that their property could offer a route out of their debt concerns and into a better mental health space. That’s why broker communication is so important – the current challenges offer an excellent opportunity for advisers to reconnect with their customer bank, to open that dialogue about how products like second charge mortgages could make a tangible difference to the customer’s financial and mental health.
Employing the right communication strategies could mean that brokers can reach new customers too, including those who up to now have been unaware of the benefits that come from independent advice.
The cost of living crisis coming so soon after the challenges of the pandemic mean that significant numbers of households across the country have a level of outstanding debt which is negatively impacting their lives. As an industry, we can help them improve that situation by working together to educate them not only about individual products but more fundamentally about how advice can support them.
You can find out more information on how the current economic environment is impacting the attitudes and behaviour of the nation’s households by reading the latest Pepper Money Specialist Lending Study. This study is our most extensive primary research to date and takes a broader, detailed look at the views and impacts of mortgage customers, covering the cost of living crisis, adverse credit, self-employed and first-time buyers.
Download your copy of the study now here.
Tom Whitney is head of sales, second charge mortgages at Pepper Money
