Borrowers using second charges for purposes beyond debt consolidation

More second charge borrowers are using the proceeds from their loans for other purposes beyond debt consolidation, according to the latest data from Evolution Money.

Related topics:  Specialist Lending   |   Rozi Jones
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22nd June 2021
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"The number of prime customers purely using them for that purpose has dropped from 59% to 43%, while home improvement usage has increased."

Evolution's quarterly data tracker analyses data from two different types of its second charge mortgage products, split between those borrowers using the loans for debt consolidation purposes, and those clients who have prime credit ratings.

The latest version of the tracker shows a more even picture in terms of the volume and value of second charge loans being taken by both types of borrowers.

Looking at its total lending data for the three months up until the end of May 2021, the product split by volume of mortgages is 74% debt consolidation vs 26% prime, and by value 64% debt consolidation/36% prime.

For those borrowers specifically using a second charge mortgage for debt consolidation purposes, the average loan amount is now close to £21.3k, with an average term of 125 months, and average LTV falling back to 72.4%. Borrowers, on average, continued to consolidate five specific debts, however the average value of the debts consolidated had dropped to below £14,400.

Over the last three months, Evolution data shows the most common uses of a debt consolidation second charge mortgage were unchanged from the previous iteration of the Tracker.

They were: to pay a loan provider (49% - the same level as the previous tracker); to pay a bank (27%, down from 37%); to pay off retail credit (17%, up from 8%); and to pay off car finance (3%, down from 5%). Borrowers also used their second charge mortgage to pay debt collectors, first charge mortgages and utility providers.

For prime borrowers, the average loan amount is now £33.6k, down from £35.7k with an average term of 157 months, from 166, and an average LTV dropping below 70% from 77.4%

Prime borrowers are typically taking out these second charge mortgages again for debt consolidation, however this is down from 59% to 43%. Conversely, home improvements now account for 23% of loans, up from 9% three months ago.

Steve Brilus, CEO of Evolution Money, commented: “Our second iteration of the Evolution Money Second Charge Mortgage Tracker shows some similarities with the first, but also a number of deviations, particularly when it comes to prime borrowers and the likelihood they will use the proceeds from their loans for other purposes beyond debt consolidation.

“There’s still no doubting that the vast majority of both debt consolidation and prime borrowers are using seconds to pay off debts from various sources, but the number of prime customers purely using them for that purpose has dropped from 59% to 43%, while home improvement usage has increased.

“Given the nature of the first-charge market at present, with the huge levels of volumes having to be completed before the end of the stamp duty holiday deadlines, it is perhaps no wonder that many customers are not willing to put themselves into that ‘bun fight’, particularly those who want to keep competitive first-charge mortgages, who don’t or can’t remortgage, but still see the opportunity to use their existing equity to fund home improvements.

“Securing a first-charge remortgage in this situation, with many lenders and conveyancers stretched beyond their capacities due to the huge demand they are facing, is difficult, and given we – as a second-charge mortgage lender – can provide the funds required in a matter of days, it is no wonder many advisers are looking at the second-charge options available. We sense that demand from these sources will continue to grow.

“As will using a second-charge mortgage by those borrowers who want to specifically pay off debt. For our debt consolidation customers, we’ve seen more looking to pay off retail credit, while the numbers servicing bank and car finance debts have dropped off, although the numbers paying loan providers remain at exactly the same levels.

“Understandably, coming out of lockdown has left many homeowners with more debt now than when they entered it. However, with a greater degree of stability and certainty particularly around employment, they are looking to advisers to help them pay off those debts and seconds are increasingly coming onto the radar.”

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