Paying off debt with a second charge mortgage

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The rate of UK inflation fell to its lowest level in two and a half years in March, reaching 3.2% following a peak of 11.1% in late 2022. This is good news for many UK households and the wider mortgage market as it signals the start of greater ongoing stability in the UK economy and a slight easing of pressure on many people’s finances.

However, while falling inflation is always welcome news, it doesn’t necessarily mean that the price of goods and services is also on the decline. Higher interest rates and increased living costs means that many people are continuing to feel the squeeze on their finances, particularly when it comes to servicing the demands of everyday living expenses.

In fact, the economic challenges of the last few years mean there are still a large number of people struggling to meet, or falling into, greater levels of debt as they struggle to make ends meet. By taking out a second charge mortgage and consolidating this debt, these borrowers can make their repayments more manageable and affordable over the long term.

The second charge lending market has seen a surge in popularity over the last few years, and despite a slowdown over the last few months of 2023, the market has seen a strong start to 2024.

Figures from the Finance & Leasing Association shows new business volumes in February were up 17% on the previous year, with debt consolidation continuing to be a key driver behind the growth in sales, accounting for 60 per cent of all loan agreements over the month.

In addition, a further 23% of loans were earmarked for a combination of both debt consolidation and home improvement purposes, signalling the ongoing significance of second charge loans as a debt management tool.

For brokers with clients looking at ways to capital raise in order to pay off debt, exploring the benefits of a second charge mortgage as an alternative to remortgaging can make perfect financial sense and, in many circumstances, may prove to be a more financially astute way of raising capital.

This is especially true for those with a preferential fixed rate on their first charge mortgage, as the higher interest rate environment means they would likely move on to a more expensive deal and lose the lower rate on their first charge loan.

Some borrowers may also face a hefty early repayment charge for leaving their first charge mortgage before the end of the term, therefore a second charge mortgage could better serve their needs by enabling them to tap into the equity they have built up in their home and using the money to pay off any outstanding debt.

In some cases, it may also help these borrowers better manage their finances by reducing the number of monthly payments into one single amount and making budgeting more manageable by spreading the cost of repayments over a longer period of time.

Obviously, a second charge mortgage will not be suitable for everyone, and it is important that brokers explain the associated risks to every client so they understand the risk of repossession should they fail to keep up with repayments.

Norton Home Loans offers second charge mortgages ranging from £3,000 to £250,000, with a maximum LTV of 80% available. Applicants must be aged between 21 and 85 years of age and can secure a term of up to 25 years, enabling them to spread the cost of the loan over a longer period of time and therefore gain greater flexibility in terms of affordability.

As each application is individually assessed and underwritten, brokers can also rest assured that their client will get the best deal for their circumstances.

For those brokers with clients struggling with debt repayments and seeking a solution to better manage their monthly repayments, it may be worth speaking to a specialist lender about the benefits of second charge mortgages as a means of consolidating debt by borrowing against the equity in their home.

David Binney is head of sales at Norton Home Loans

This information is for Intermediaries only and should not be distributed to potential borrowers

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