"It may work out better over the long-term to consolidate multiple loans and credit card debts into a second charge mortgage"
Figures from the latest Bank of England Money & Credit Report, shows consumers borrowed an additional £1.3 billion in consumer credit in March this year, £0.8bn of which was new lending on credit cards.
Credit card borrowing was up 10.6% compared to March 2021, with borrowers’ total outstanding debt now standing at a substantial £60.4bn, compared to £54.2bn in March 2021. And at 18.01%, the cost of such borrowing sits just below the 20.30% rate charged on interest-charging overdrafts.
We can all be guilty of ‘sticking things on the credit card’ when out shopping or paying for a large purchase such as a holiday, but for most this will be a short-term, low-cost way of borrowing and spreading the cost of our spending.
As bills continue to escalate however, some borrowers are starting to turn to credit cards to cover the cost of day-to-day living.
Recent research from debt charity, the Money Advice Trust, shows that in the last three months one in four - 25% - of UK adults have used some form of credit to pay for bills or essentials, such as food, water, rent, council tax and energy. Furthermore, just short of one in five – 19% - expect to have to borrow money to pay for essentials in the next three months.
With inflation hitting a 40-year high and talk of a recession in the growing, we could see these figures rise further.
When it comes to credit cards there can be a tendency among some to view this type of borrowing as trivial compared to other forms of finance, such as a second-charge mortgage.
Perhaps this can be traced back to the ease with which some credit cards and spending limits can be obtained - often allowing a borrower to spend thousands over several cards, with nothing or little, in the way of an affordability assessment – unlike the process for obtaining a second charge mortgage.
While for some borrowers using a credit card and paying the balance off relatively quickly might make financial sense, for others, a casual attitude towards spending on credit cards when they are already in debt might be doing more harm than good.
Excessive credit card use also runs the risk of negatively impacting a client’s credit score and future mortgage affordability.
For some borrowers therefore, it may work out better over the long-term to consolidate multiple loans and credit card debts into a second charge mortgage, giving them one single fixed payment over a set period of time, with a clear end date for paying off their second charge product and ridding themselves of debt.
Making just one monthly payment might prove to be more manageable for some and help them stick to a budget. It may also work out cheaper to consolidate debt into a second charge, rather than a credit card with a variable rate.
The latest Evolution Money Second Charge Mortgage Tracker shows the average loan amount for a borrower using a second charge for debt consolidation is £22,184, with an average term of 125 months. Typically, when consolidating debt, we see borrowers use a second charge to pay back a loan provider, a bank, retail credit, or car finance.
As the cost of living continues to pile pressure on borrowers’ finances, it is vital that second charge mortgages are not overlooked in favour of other, ‘safer’ perceived forms of lending such as credit cards.
Attitudes towards second charge mortgages have changed for the better over the last several years, due in part to regulation by the FCA and a greater understanding of their uses. It is therefore imperative we keep that momentum going.
