"One question we are frequently asked by brokers who are considering this route for their clients is whether a second charge mortgage will make it harder for their clients to remortgage in the future."
After many months of a Bank Base Rate sitting just above zero, rates are on the rise. They may not increase quickly and will have little immediate impact on mortgage payments for the vast majority of customers who are on fixed rates, but any rise will increase the cost of servicing unsecured debt and revolving credit – and this always encourages people to look at ways of managing their outgoings.
On top of rising rates, people are also having to tackle the challenge of higher prices in the shops as a result of inflation, and energy costs are on an upward trajectory, significantly eating away at the monthly income of anyone who heats their home or uses electricity.
This rising cost of living means that people are going to have a challenging year this year. In fact, a recent statistic published by Pepper Money as part of its Adverse Credit Report found that 81% of people with adverse credit say a £100 increase in their bills would significantly impact their finances.
One way of helping to manage monthly outgoings is by paying off unsecured debt and revolving credit by increasing secured borrowing, either through a remortgage, further advance or second charge mortgage. There are obviously considerations in converting unsecured debt to secured debt and potentially increasing the term over which the debt is repaid, and debt consolidation isn’t for everyone, but in the right circumstances, it can provide a vital lifeline for borrowers, giving them greater control over their monthly finances.
The most suitable method of secured borrowing that is used to consolidate debts also depends on the individual customer. For those who are approaching the end of their current deal, a remortgage may be more appropriate. For those who are currently in the middle of a fixed rate mortgage, and those who want greater control over the term in which they repay the debt, a second charge mortgage can provide the more suitable solution.
One question we are frequently asked by brokers who are considering this route for their clients is whether a second charge mortgage will make it harder for their clients to remortgage in the future. In fact, the opposite is true. Mortgage affordability is based on monthly outgoings, so reducing the amount spent on servicing credit, reduces those outgoings.
In addition, a second charge mortgage is a known quantity. Customers with open accounts on revolving credit, have the potential to significantly increase their borrowing in the future without the need to apply for further credit. So, by paying off these accounts, and then closing them, borrowers can put themselves in a stronger position to secure the right remortgage for their circumstances.
Debt consolidation is going to be a key theme for brokers this year. Make sure you make use of all the tools available to help your clients, and if you don’t have experience in working with one or more of the available options, partner with an expert who can help you to help your clients be in the strongest possible financial position.
