After a difficult 12 months, prospects for the second-charge market in 2021 look encouraging.
We have seen significant levels of enquiries from advisers and their clients, while lenders have also responded by revamping their product lines and criteria.
It is undoubtedly the case that the core uses for second-charge loans, such as for home renovations or consolidating debt, have not disappeared with the pandemic.
If anything, they have become even bigger drivers for borrowers.
One additional area where second-charge loans could prove particularly useful, but which may not be on the radar for mortgage advisers, is for clients classed as being in ‘persistent debt’.
What is persistent debt?
Last year, the FCA introduced a new definition for borrowers in what it termed as ‘persistent debt’.
This was classed as borrowers who have been charged more in interest and fees on their credit card and have paid just the minimum payment for the preceding 18 months.
There’s no shortage of ‘persistent debt’ borrowers either. A study by the FCA last year suggested there are as many as three million credit card customers who are in persistent debt, who have paid an average of around £2.50 in interest for every £1 repaid.
Given the difficulties of the last year, let’s be clear – the number of persistent debt borrowers is only likely to have increased.
The role of second-charge loans
So, what’s that got to do with second-charge mortgages?
Well, credit card providers are required to write to borrowers in this position and put together a plan with them to start actually clearing that outstanding debt.
If they can’t, then spending on the card may be frozen.
Now, for some borrowers this won’t be a huge problem. They may have the disposable income to increase the amount they are paying each mont, or even simply pay off their balance each month, and carry on as usual.
But let’s be clear, the pandemic means there are far fewer borrowers in a position to just absorb those larger payments without it causing further issues.
As a result, these borrowers face having their cards frozen unless they can come up with the funds to get out of this persistent debt classification.
One customer of ours with credit card debts of c.£30,000 had their minimum payments increased with little notice from £435 a month to just under £1,000.
Their credit card company wanted them to pay twice the interest accrued that month as a means to drive down their balance.
Unable to take such a drop in disposable income and while in the middle of a fixed rate period on their first-charge mortgage, their financial adviser successfully identified a second-charge mortgage as the solution and introduced them to us.
With a significant monthly saving, as well as an overall saving over the term of the loan, the client is far happier and has vowed never to use their cards again.
With a second-charge mortgage, homeowners can tap into the equity they have already built up in their property, releasing money to clear that outstanding credit card debt and maintain the card as a spending option, without having to touch their existing mortgage.
It’s a smart way to sidestep any potential early repayment charges or the risk of having to move to a higher interest rate on their first-charge mortgage.
What’s more, the speed of arranging a second-charge loan is now extraordinary.
We’ve had cases go from initial enquiry to completion in less than a week, an unbelievable turnaround that – chances are – isn’t going to be possible through the usual remortgage routes.
These speeds have a tangible benefit too.
By delivering that funding so quickly, it means the client can clear that balance and remove the risk of their cards being frozen within a matter of days, rather than suffering through the uncertainty and stress of it dragging on for weeks, or even months.
Going the extra mile
We know only too well that mortgage advisers across the country pride themselves on delivering a holistic service, on helping their clients with financial issues and queries beyond a simple purchase mortgage.
And that’s why it’s so important for advisers to speak to their clients about their credit card position, about whether they fall into the persistent debt category and have a way out of it.
The FCA’s approach to persistent debt borrowers provides the advice profession with an excellent opportunity to reopen those lines of communication with your existing client bank, and to steer them away from the risk of having their spending options reduced.
Clients remember those advisers who go the extra mile; it’s a way to secure their business for life, not just for their next home purchase.
