Second Charge Watch: Shift into second gear

The Bank of England’s latest base rate hike was more or less inevitable as the global situation continues to fuel runaway inflation.

After several months of base rates just above zero, interest rates are certainly on the rise and no one knows for sure how high they will go.

These increases may have little immediate impact on mortgage payments for most customers with fixed rates. But any increase will increase the cost of servicing unsecured debt and revolving credit – and that always encourages people to look for new ways to manage their spending.

Some lenders have better products than they had at the start of the pandemic

In addition to these rising tariffs, consumers face the challenge of rising prices in stores, 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 April 1 for around 22 million customers, means those who default on direct debit tariffs will experience an increase in the gas bill of £693 – from £1,278 to £1,971 a year.

This increase in the cost of living means that consumers will have a tough time this year. In fact, a recent stat published by Pepper Money as part of its Adverse Credit Report found that 81% of people with adverse credit said a £100 increase in their bills would have a significant impact on their finances.

Secured loan

One way to help manage monthly expenses is to pay off unsecured debt and revolving credit by increasing secured borrowing, through a mortgage, new advance, or second mortgage.

There are obviously considerations in converting unsecured debt to secured debt and potentially increasing the length of time debt is repaid, and debt consolidation is not for everyone. However, under the right circumstances, it can be a vital lifeline for borrowers, giving them greater control over their monthly finances.

Lenders are expanding how they use AVMs and improving options in areas such as interest-only

The most appropriate form of secured borrowing used to consolidate debt also depends on the individual client. For those nearing the end of their current contract, a mortgage may be more appropriate. For those in the middle of a fixed rate mortgage and those who want more control over the term in which they repay debt, a second mortgage may be the most suitable solution.

A common question we get from brokers considering this route for their clients is whether a second 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 expenses, so reducing the amount spent on servicing credit reduces those expenses.

Known quantity

Also, a second mortgage is a known quantity. Customers with open accounts on revolving credit have the ability to significantly increase their borrowings in the future without needing to apply for additional credit. So, by paying off those accounts and then closing them, borrowers can put themselves in a stronger position to get the right mortgage for their situation.

Restructuring revolving credit in this way not only provides a way to reduce monthly expenses, but it can also provide borrowers with a realistic path to debt relief, helping them break the cycle and pay off the balance.

Interest rates are on the rise and no one knows for sure how high they will go

We are seeing strong demand for second mortgage loans for debt consolidation. In a rising rate environment, now is the time to act because rates are as low as they will be for the foreseeable future.

The second load market is also currently very competitive. Some lenders have better products than they had at the start of the pandemic and there are some very good deals.

And there are other kinds of product innovations, with lenders expanding how they use automated valuation models and improving options in areas like interest-only.

Mortgage affordability is based on monthly expenses, so reducing the amount spent on credit service reduces those expenses

The rising cost of living puts debt consolidation at the forefront of your clients’ concerns. If you want to offer them the best options for their situation, you need to be able to access the expertise, experience and connections of a specialist in the second mortgage market.

Stewart Simpson is a second mortgage specialist at Brightstar Financial

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