Taking care with consolidation

Tom Whitney, head of second charge mortgage sales at Pepper Money, explains how taking out a second charge mortgage can tap into the value built up in a homeowner's property over time, consolidating their debts into lower monthly payments and free both their wallet and their mind.

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Tom Whitney | Pepper Money
23rd November 2022
Tom Whitney Pepper
"For some customers, debt consolidation could present an option to help them take the sting out of unsecured credit rate rises."

The cost-of-living crisis continues to dominate the headlines and the concerns of many households. According to a recent study we conducted at Pepper Money, 71% of people are concerned about their financial situation as a direct result of the cost-of-living crisis, while 76% say a £100 increase in their monthly bills would have a significant impact on their finances.

Many people are turning to credit to help make ends meet and, while the Bank of England, says that credit card borrowing fell in September, the annual rate of growth across all forms of consumer credit continues to be more than 5%. Just as levels of debt are increasing, so is the cost of servicing that debt. In January 2019, the Bank of England said the average credit card interest rate was 18.6%. By September this year this had increased to 22.2%.

For some customers, debt consolidation could present an option to help them take the sting out of unsecured credit rate rises. Far from being a matter of last resort, savvy borrowers will be looking to streamline their finances, reduce monthly outgoings and shore up their situation in the face of an uncertain economic environment.

By taking out a second charge mortgage, for example, a homeowner can tap into the value built up in their property over time, consolidating their debts into lower monthly payments and freeing both their wallet and their mind.

A mindful approach

As with any form of finance, debt consolidation is not a panacea, and there will be those for whom this is not the best option, but an open conversation with your customers will help to uncover the best path for them to follow.

To ensure the best outcomes for our customers and indeed the most positive impact on society, Pepper Money takes great pains to be mindful about lending. To this end, we employ rigorous and robust processes to identify those borrowers whose circumstances would not benefit from debt consolidation – for example, if they have a history of refinancing onto increasingly large balances, this might risk increasing their indebtedness. It may not, but it raises a flag that we then investigate.

With a combination of expertly deployed technology and human underwriting, we’re able to undertake an in-depth analysis of all lending to ensure that debt is deployed for good, helping our customers succeed. The median LTV of our second charge mortgage customers who take a loan for debt consolidation is just under 70% and average monthly payments are £375. Given that the average income of our second charge customer is £52,900 per annum. By comparison the median salary in the UK is £31,300, we are comfortable that our second charge lending is being used proactively by customers who see the benefits in this type of borrowing, rather than those who can’t see any alternative.

Taking care

Whatever your customer’s income, debt is an often difficult and deeply human subject. While the idea might be universal, every person will have different motivations, drivers, responsibilities and goals when it comes to their money.

For some, their journey may simply be to make their monthly repayments manageable enough to cope with the rising cost of living, and gradually work their way out of reliance on debt. Others, meanwhile, will see the opportunity to make their money and assets work harder and go further at a time when this is more important than ever.

Debt consolidation is a valuable tool that needs to be handled with care by both advisers and lenders. By underpinning our lending with a personal approach, Pepper Money can create positive social outcomes and help homeowners not only reduce some of the pressure of an uncertain environment. But ultimately achieve their goals – whatever those might be – and we hope that this can help you in your conversations.

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