“Not only does a second charge provide a different route for borrowers, it actively avoids some of these potential drawbacks of refinancing.”
As we approach the end of the year, many advisors will have the opportunity to hear from clients who want to get their debt under control. The approach of Christmas often coincides with borrowers taking a step back from their finances, recognizing that they would like to pay less for their various forms of credit, and exploring their options for consolidating these debts into one monthly payment.
Clients looking to consolidate debt will have a few options if they want to use their real estate asset, but it’s important that advisors consider all of these possible solutions rather than just the one they’re most familiar or comfortable with.
Re-mortgage for debt consolidation
One option will be to remortgage, to take out a bigger loan so that they can erase all of those existing debts on credit cards, personal loans and the like. They then have only one debt to settle, their mortgage.
It is certainly a simple option – there will only be one repayment date to watch out for, one interest rate to know. But there are some potential drawbacks that come from the remortgage route.
The first, and potentially the most punitive, is the risk of having to pay prepayment charges. Advisors don’t need me to tell them that the vast majority of their clients are likely to have fixed rate mortgages these days, and more often than not, they are long. Given the way ERCs are calculated as a percentage of the mortgage loan balance, they can easily become a hefty cost if your client is only halfway through a five-year fixed rate. It’s an exit fee that is really going to sting on the exit.
Nor is it the only financial blow that comes from the remortgage. Your client will also need to change rates. It’s not a bad thing if it turns out they’re on a bad deal but given the level of competition we’ve experienced in recent years, there’s a real risk that they’ll have to move on to a less attractive rate, especially if the additional borrowing moves their loan into a higher loan-to-value range. As a result, re-mortgaging it in order to erase those additional debts can mean that the client not only has to remit thousands of ERCs, but also switches to a higher interest rate, with a larger mortgage balance to start. .
it doesn’t have to be like that
There is an obvious alternative, however, in the form of a second mortgage. And not only does a second charge offer a different route for borrowers, it actively avoids some of the potential drawbacks of refinancing.
It should be emphasized that a second mortgage is secured by the equity the borrower has in the property. As a result, the original mortgage is not affected by the loan. This means that there are no worries about exit fees, moving LTV bands or changing interest rates – the client can continue with this first mortgage as usual and continue to benefit. of the excellent rate you have guaranteed him.
A second charge is separate from this original mortgage, which means that there is no unpleasant ripple effect resulting from the increased amounts required for debt consolidation.
Rising equity levels
It is impossible to ignore the considerable growth in house prices that has taken place over the past year as a result of the stamp duty holiday. This tax break has prompted a large number of potential buyers to take the plunge and continue a movement, and it has pushed up prices across the board.
In fact, the latest figures from the Office for National Statistics show that the average house price jumped 10.6% in the 12 months leading up to the end of August, which means a new average price of Â£ 264,000 . In monetary terms, this represents an increase of around Â£ 25,000 from a year ago.
And that’s great news for any borrower who is considering a second charge for debt consolidation purposes. This price growth means that they have a lot more equity in their property and are therefore in a better position to raise the necessary funds to clear those debts.
The demand for help with debt consolidation will only increase in the coming months, so it is important for advisors to keep abreast of the full range of options available to their clients. If they’re not comfortable handling secondary costs on their own, now is the time to find a second charge specialist to partner with and who can help their clients find the best possible financing solution.