"It’s clear there has been a shift back in favour of debt consolidation and this is likely to be fuelled by the data coming from a period when Government support was being removed"
Looking at its total lending data for the last three months, up until the end of November 2021, the product split by volume of mortgages is 77% debt consolidation/23% prime, and by value 67% debt consolidation/33% prime.
This is compared to the previous period where both the volume and value of lending to debt consolidation borrowers was lower. During the previous two quarters covered by the tracker, lending by volume to prime borrowers had been around 10% higher than in Q4, and there was a more even split between debt consolidation and prime.
Evolution Money says the tracker may well show the impact of Government schemes coming to an end, such as furlough payments, with homeowners need to find other sources of money and looking to utilise their equity in order pay off debts accumulated during the pandemic.
For those borrowers specifically using a second charge mortgage for debt consolidation purposes, the average loan amount has increased just slightly to £21,448, with an average term of 123 months, and average LTV also increasing to 73.9%. Borrowers, on average, continued to consolidate five specific debts, however the average value of the debts consolidated increased to £15,358.
Evolution data continues to show a consistency across the most common uses of a debt consolidation second charge mortgage. Close to half were used to pay back a loan provider, followed by paying a bank, repaying retail credit, followed by car finance.
For prime borrowers, the average loan amount has also increased up to £35,215, with an average term of 153 months, and an average LTV also increasing to 72% from 69%.
Prime borrowers are typically taking out these second charge mortgages again for debt consolidation (55%), home improvement and some consolidation (23%) and home improvement (18%).
Steve Brilus, CEO of Evolution Money, commented: “Second charges have always been used by homeowners for debt consolidation purposes however in previous iterations of the tracker we were starting to see a growing number of prime borrowers using seconds for purposes which were not purely to pay off debts.
“This time around however, it’s clear there has been a shift back in favour of debt consolidation and this is likely to be fuelled by the data coming from a period when Government support was being removed, particularly with regards to furlough, and the fact that many people who had accumulated debts during the pandemic were looking for solutions to pay those more expensive debts off.
“This may be why we’ve seen an increase in both loan amount and the average value of debts consolidated by both debt consolidation and prime borrowers, and why LTVs have moved upwards. We should not underestimate the benefits that debt consolidation can provide and with second charge rates likely to be much lower than many other forms of debt, it makes perfect sense for some homeowners to take out a second charge and pay off their more expensive debts first.
“It’s likely that as we move into 2022 debt consolidation will continue to remain the number one reason for taking out a second charge mortgage, however we should not rule out more prime borrowers requiring these products especially if they were able to secure an ultra-competitive first charge rate over the last 12 months, but still find themselves with a requirement to access further equity.
“2021 was a very strong year for the seconds market, and we certainly believe 2022 will be the same. This is a growing sector of the market which advisers should be active in to help those clients with these specific requirements.”