As borrowers’ disposable incomes continue to dwindle, it will only be a matter of time – if we’re not there already – before we start to see this filter through and influence the type of advice that is needed from advisers.
The Money and Pensions Service (MaPS) recently revealed the startling figure that over 12 million people are now borrowing money for food or essential bills and half of them are doing so for the first time in their lives. This figure is significant and may already be the reality for some of your clients. Mounting debt is increasingly becoming a universal issue, not just affecting those who are unemployed or on a low income, as once it might have been.
Of the 2,180 UK adults that were surveyed by MaPS, 23% said they have relied on credit or money from family and friends to buy food in the last three months. The same number – 23% – have done so for electricity and gas. Similar numbers said they are relying on borrowing to meet the cost of their rent or mortgage – with 52% doing so for the first time. It estimates that up to 36% of UK adults could soon be relying on credit to make ends meet.
Being in debt may be new for some clients and as such, this might change the lending options open to them. For some of those in debt, or at risk of falling behind on mortgage payments, professional debt advice or speaking to their mortgage lender will be the best option.
For others however, whose debt or missed payments may be a temporary blip or the result of overspending or mismanaging their finances, a second-charge mortgage could prove beneficial.
Instead of borrowing through multiple creditors, a borrower could break this habit and merge all of their debts into a singular second-charge mortgage, with one monthly payment and one interest rate – potentially saving them hundreds of pounds in the process.
As the number of borrowers taking on credit increases, so too has the interest rate on some forms of borrowing. The latest figures from the Bank of England’s Money and Credit Report shows the effective rate on new personal loans increased by 64 basis points to 7.87% in November last year, the highest level since December 2017. While the interest rate on credit cards dropped slightly from October, it still stood at 19.24% in November.
The report highlights UK borrowers’ continued reliance on credit, with an additional £1.5 billion in consumer credit borrowed in November – higher than the previous 6-month average of £1.1 billion.
This was split between £1.2 billion on credit cards – up from £0.4 billion in October – and £0.3 billion through other forms of consumer credit. The annual growth rate of credit card borrowing rose from 11.5% in October to 12.2% in November.
The additional lending in itself carries an increased risk of defaults. An estimated 1.9 million households missed, or defaulted on at least one mortgage, rent, loan, credit card or bill payment in the lead up to Christmas, according to the latest findings from Which?’s Consumer Insight tracker.
It highlights that missed payment rates generally tend to be lower in the run up to the festive period and peak in January, meaning the post-Christmas data is likely to convey an even bleaker picture. Which? research this time last year showed an estimated 1.7 million households missing at least one payment – but that number shot up to 2.5 million in January 2022.
Just a couple of missed payments on loans and credit cards could impact a borrower’s credit score and potentially damage their remortgage chances with some lenders. For those borrowers with missed payments and/or some form of debt, a bespoke approach to affordability from a second-charge lender may be transformative.
As we move further into the year, aiding clients with some form of debt – big, or small, is increasingly likely to feature in an adviser’s role and a second charge should form a pillar within this advice process.
Susan Baldwin is interim head of lending at Evolution Money
