According to The Money Charity, as of June 2022 average credit card debt in the UK had risen 9.72% year-on-year, to £2,229 per household, with total unsecured debt reaching £3,855 per household. Inflation is on the rise, hitting 10.1% in the year to July 2022, with Bank of England predictions suggesting we could see 11% before the year is over – so these bills are only going to get harder to pay, while rising living costs create a pincer-effect on people’s finances.
In April to June 2022, 327 people were declared bankrupt or insolvent every day in England and Wales, while Citizens Advice Bureau dealt with 2,033 debt issues per day in the year to May 2022. The reality is – to put it mildly – that the UK is facing a difficult period that will affect an enormous range of households, with different income types and credit backgrounds. Effective debt management is only going to become more important in this environment.
In order to cope with the challenges ahead, borrowers should be considering how best to make their money go further, using the assets at their disposal to shore up their finances. For those who own their own home, speaking to a specialist broker about consolidating their debts into a more manageable monthly payment might be one of a few viable options.
Taking a second look
For some of those looking to use the value of their home to help ease the strain of unsecured debt, remortgaging is an option to consider especially if their mortgage is up for renewal. However, with rates having risen dramatically, many borrowers well might be reluctant – or unable – to relinquish their current terms. Instead, borrowers should give consideration to the benefits of using a second charge mortgage in order to borrow against their property’s equity, leaving the original mortgage untouched.
As it is secured against home equity, a second charge can provide access to greater funds than other debt solutions, as well as offering better interest rates, so this can be a great solution for those with larger amounts of debt to repay – particularly if they are in a position to have built up considerable equity in their home and looking for a more manageable monthly payment.
Transferring debt from short-term credit onto a longer term with the potential for more favourable rates and lower monthly payments, could make all the difference at a time when monthly outgoings are skyrocketing, however borrowers must ensure that they get the best advice when replacing unsecured credit over a longer term and should reach out to specialists in the field to ensure it is the right outcome.
Adverse credit
Complex financial histories, non-traditional incomes, and adverse credit are all becoming a much greater part of life under the ‘new normal’. The pandemic helped some save and shore up their finances, while many others faced unexpected challenges and ended up with credit blips through little fault of their own.
Meanwhile, the cost of fuel, everyday expenses and bills are all factors likely to leave many with a patchy credit history over the coming months. With Ofgem’s energy price cap now being revised quarterly, and bills expected to reach more than £4,200 per annum next year, we are likely to see many more people struggling despite best efforts to make payments that previously would have fit well within their means.
At Central Trust, we understand the importance of examining each application on a case-by-case basis, and taking the time to understand the customer’s circumstances and the history that led to credit issues; looking at the bigger picture and how those circumstances have changed. While we ask for a minimum household income of £17,500 per annum, we also understand the complex tapestry that makes up modern finances, and can accept various types of income, including benefits, pensions, and buy-to-let profits.
The full gamut
On hearing the words ‘adverse credit’ or ‘debt consolidation’, certain customer profiles might spring to mind. However, the reality is that credit blips can affect everyone, from minimum wage workers to high net worth individuals, while borrowing on unsecured credit is near universal.
The average homeowner looking to use a second charge for debt consolidation might range from someone whose finances have taken an unexpected hit, to one who is simply looking to take strategic control of their debt and make their money work better for them. Taking proactive control of finances is a must for the full range of customers, and it is important to understand that there is no standard profile for debt consolidation.
Our individual, human-led approach not only means that we can take the time to understand the individual circumstances of our borrowers, but it also empowers us to take a rigorous approach to ensuring that we are lending to the right person at the right time. Debt consolidation and second charges might not be the correct solution for everyone, so it is vital to partner with a lender that takes a responsible and nuanced approach.
No matter a customer’s background, the future is going to throw out economic challenges, both short and long-term. As homeowners increasingly look for ways to make their finances work harder, second charges should be front of mind.
Maeve Ward is director of commercial operations at Central Trust