“Not only does a second charge provide a different path for borrowers, it actively avoids some of those potential drawbacks that come with remortgage.”
Clients wishing to consolidate their debt will have a few options if they wish to use their real estate asset, but it is important that advisors consider all of these possible solutions rather than just the one with which they are most familiar or comfortable.
Remortgage for debt consolidation
One option will be to remortgage, take out a bigger loan so they can clear all those existing debts on credit cards, personal loans and the like. They then have only one debt to repay, their mortgage.
It is certainly a simple option – there will be only one repayment date to watch, only one interest rate to know. But there are a few potential downsides that come with going 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 be on fixed rate mortgages these days, and more often than not these are long mortgages. Given the way ERCs are calculated as a percentage of the outstanding mortgage balance, they can easily become a significant cost if your client is only halfway through a five-year fixed rate. It’s an exit fee that will really sting on the exit.
Nor is it the only financial hit that comes from remortgaging. Your client will also have to change rates. It’s not a bad thing if they’re on a bad deal, but given the level of competition we’ve seen in recent years, there’s a real risk that they’ll have to move to a less attractive rate, in particularly if the additional borrowing moves their loan into a higher LTV range. As a result, remortgage in order to erase these additional debts can mean that not only does the customer have to put thousands of dollars back into the CREs, but they also switch to a higher interest rate, with a larger mortgage balance. to start.
It doesn’t have to be like this
There is, however, a clear alternative, in the form of second mortgages. And not only does a second charge offer a different route for borrowers, it actively avoids some of those potential drawbacks that come with remortgage.
It should be emphasized that a second mortgage is secured by the equity the borrower holds in the property. Therefore, the original mortgage is not affected by the loan. This means no worries about exit fees, moving LTV bands or changing interest rates – the customer can carry on as usual with this prime mortgage and continue to benefit the excellent rate you got for him.
A second charge is separate from this initial mortgage, which means there is no nasty ripple effect of increasing amounts needed for debt consolidation.
Rise in equity levels
It is impossible to ignore the considerable growth in real estate prices that has taken place over the last year or so, following the suspension of stamp duties. This tax break prompted a large number of potential buyers to take the plunge and move, and it drove up prices across the board.
In fact, the latest figures from the Office for National Statistics show the average house price jumped 10.6% in the 12 months to the end of August, meaning a new average price of £264,000. . To put that in cash terms, that’s an increase of around £25,000 from a year ago.
And that’s really good news for any borrower who is considering a second charge for debt consolidation purposes. This price growth means that they hold much more equity in their property and are therefore in a better position to raise the necessary funds in order to pay off these debts.
The demand for debt consolidation help will only increase in the coming months, so it’s important that advisors keep up to date with the full range of options available to their clients. If they are not comfortable handling second charges themselves, now is a good time to find a second charge specialist to partner with and who can help their clients find the best financing solution. possible.