Unsecured debt is at record levels and, in the right circumstances, a second charge mortgage can provide the most suitable solution to help borrowers consolidate their debts and lower their monthly payments.
New analysis published by the TUC earlier this year revealed that total unsecured debt rose to £428bn in 2018, which is a record high and represents £15,385 of unsecured debt per household. The study found that unsecured debt as a share of household income is now 30.4% – the highest it’s ever been, and above the level it reached in 2008 ahead of the financial crisis when it was 27.5%.
This is driving demand amongst consumers for debt consolidation so that they can make their debts more manageable.
While there are options in the first charge market, some lenders have lost their appetite for debt consolidation and can impose restrictive affordability criteria that makes it difficult for customers to borrow enough to consolidate their debts. Regulation of the second charge market has also given people greater confidence to look to second charge mortgages as a potential solution.
By moving the balances onto a cheaper second charge mortgage, borrowers can immediately relieve some of the strain, which can get them out of a hole in the short term while they work towards a long-term solution to manage their debts. Often it’s the case that a client will turn to a second charge mortgage to clear their debts in the short term, with a view to remortgaging to combine both the first and second charge mortgages in the future. Some first charge lenders favour paying off a second charge mortgage over unsecured debts as it is so easy to run up unsecured debts again immediately after they have been paid off.
With so much unsecured debt on people’s plates, we can only see demand increasing for debt consolidation second charge mortgages. It’s important to note however, that this will not always be the most appropriate solution for the client.
There are many considerations involved in moving unsecured debt to secured debt that the client needs to fully understand. First, missed payments on a secured mortgage could ultimately end up in the client losing their home. Sometimes clients who do move balances onto a second charge also increase the term over which they pay off the debt to help achieve their objective of lowering their monthly payments and this can be more expensive for the client in the long run, so careful consideration needs to be given to the impact of debt consolidation on a client’s circumstances. We will also work with the client to find out whether they have any savings that might be better deployed paying down some of their debts or if some of the debts are on 0% credit cards, in which case they may be better off leaving them in place and finding another way to pay off the balance.
Every case is different, which is why it’s so important to partner with an expert in this area. So, if you have clients who are considering consolidating their debts and you would like to discuss their options, ENQUIRE TODAY
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