BestAdvice fires the questions at Caroline Mirakian, sales director, second charge mortgages, Pepper Money.
BestAdvice (BA): Pepper Money has recently carried out research amongst homeowners about the interest payments on their credit card, overdrafts and loan debt. What did you find out?
Caroline Mirakian (CK): We found that the recent rise in interest rates could cost British homeowners billions of pounds – with a likely increase of £2.8bn on revolving credit repayments (for example credit cards and overdrafts) and a further £1.6bn on personal/unsecured loans.
The research, which was carried out by YouGov on behalf of Pepper Money, found that 3.8 million homeowners are feeling the pinch, as the average monthly repayment on their revolving credit has risen by more than £60 a month in the last six months alone.
According to the study, each household has an average of almost £3000 in debt on credit cards, store cards, and overdrafts – with approximately two million Brits having over £10,000. And, as interest rates rise, so too does cost of servicing this debt.
BA: What message should mortgage brokers take from these results?
CK: We all know that one way borrowers can take greater control of their finances is by consolidating their debt. However, according to the research, almost half (45%) of UK homeowners say they wouldn’t consider this as an option.
Debt consolidation is not the right option for everyone. But, with costs rising, the monthly commitment of servicing short-term debts such as credit cards, store cards and overdrafts, can stifle the ability of many families to meet their monthly outgoings, particularly when the cost of such credit is also increasing. So, in the right circumstances, consolidating expensive short-term credit onto a longer-term loan at a lower rate, can help to put families in greater control and to normalise their finances, as they pay down that credit over the longer term.
Brokers have an opportunity here to provide a helping hand for those clients who may be suffering in silence, worrying about their unsecured debt, and who may not have considered consolidating their debts, either through a second charge or remortgage.
BA: Why do you think people are slow to consider debt consolidation?
CK: It is sometimes dismissed as an option of last resort, and it is trust that it is not the right option for everyone. However, in the right circumstances, consolidating debts is merely taking proactive steps to restructure your personal finances and lower the cost of servicing those debts – and this seems like a very sensible move.
At Pepper Money, analysis of our lending shows that the debt consolidation loans that we advance are to ordinary people with good credit scores and good incomes. For example, the average median salary of our second charge customers is £53.9K, compared to an ONS median average UK salary of £31.3k.
Often these people have run up large balances over a long period of time and they are taking proactive steps to normalise their circumstances. In doing so they are also often improving their credit profile, and we see average credit scores increasing after taking their consolidation loan. They are also doing so whilst maintaining a comfortable buffer of equity in their homes. The average LTV on our second charge lending is just under 70%.
BA: So, what advice would have for brokers in working with clients who may want to consolidate their unsecured debts?
CK: I would say, consider all of the options. Raising capital secured on a client’s property may be their best option and there are many ways of doing this. It could be, for example, that the time has come for them to refinance and a remortgage in the best route for them, or their lender may offer particularly attractive rates on further advances.
For many, a second charge mortgage will offer the most suitable approach. Not all brokers are comfortable advising on second charges, so if you have any doubts, partner with a specialist in this area that can provide the expertise and relationships to help your client get the best deal for their circumstances. But make sure you consider all the options, because what’s right for one client may not be the best option for another.
