The latest Bank of England base rate increase was more or less inevitable as the global situation continues to add fuel to rampant inflation.
After many months of the base rate sitting just above zero, interest rates are certainly on the rise and nobody knows for sure how high they will go.
These increases may have little immediate impact on mortgage payments for most customers who are on fixed rates. But any rise will increase the cost of servicing unsecured debt and revolving credit — and this always encourages people to look at new ways of managing their outgoings.
Some lenders have better products than they had at the start of the pandemic
On top of these rising rates, consumers are having to cope with the challenge of higher prices in the shops, and energy costs are also on an upward trajectory, significantly eating away at the monthly income of anyone who heats their home or uses electricity.
Ofgem, the energy regulator, says the new energy price cap, which increased from 1 April for approximately 22 million customers, means those on default tariffs paying by direct debit will experience a gas-bill rise of £693 — from £1,278 to £1,971 a year.
This growing cost of living means consumers will have a challenging time this year. In fact, a recent statistic published by Pepper Money as part of its Adverse Credit Report found 81% of people with adverse credit said a £100 rise in their bills would significantly impact their finances.
Secured borrowing
One way of helping to manage monthly outgoings is by paying off unsecured debt and revolving credit by increasing secured borrowing, through either a remortgage, a further advance or a second charge mortgage.
There are obviously considerations in converting unsecured debt to secured debt and potentially increasing the term over which the debt is repaid, and debt consolidation isn’t for everyone. However, in the right circumstances it can provide a vital lifeline for borrowers, giving them greater control over their monthly finances.
Lenders are expanding the way they use AVMs and improving the options in areas such as interest only
The most suitable form of secured borrowing that is used to consolidate debts also depends on the individual customer. For those who are approaching the end of their current deal, a remortgage may be more appropriate. For those who are in the middle of a fixed-rate mortgage, and those who want greater control over the term in which they repay the debt, a second charge mortgage can provide the more suitable solution.
One question we are frequently asked by brokers who are considering this route for their clients is whether a second charge mortgage will make it harder for their clients to remortgage in the future. In fact, the opposite is true. Mortgage affordability is based on monthly outgoings, so reducing the amount spent on servicing credit reduces those outgoings.
Known quantity
In addition, a second charge mortgage is a known quantity. Customers with open accounts on revolving credit have the potential to significantly increase their borrowing in the future without the need to apply for further credit. So, by paying off these accounts, and then closing them, borrowers can put themselves in a stronger position to secure the right remortgage for their circumstances.
Restructuring revolving credit in this way not only provides a route to lowering monthly outgoings but it can give borrowers a realistic journey to becoming debt free, helping them to break the cycle and pay down the balance.
Interest rates are on the rise and nobody knows for sure how high they will go
We are seeing a lot of demand for second charge mortgages for debt consolidation. In a rising-rate environment, now is the time to act because rates are as cheap as they are going to be for the foreseeable future.
The second charge market is also currently very competitive. Certain lenders have better products than they had at the start of the pandemic and there are some really good deals.
And there are other types of product innovation, with lenders expanding the way they use automated valuation models and improving the options in areas such as interest only.
Mortgage affordability is based on monthly outgoings, so reducing the amount spent on servicing credit reduces those outgoings
The rising cost of living is bringing debt consolidation to the forefront of your clients’ minds. If you want to offer them the best options for their circumstances, you need to be able to access the expertise, experience and relationships of a specialist in the second charge mortgage market.
Stewart Simpson is second charge mortgage specialist at Brightstar Financial
