âNot only does a second charge provide a different route for borrowers, it actively avoids some of these potential drawbacks of refinancing.â
Clients looking to consolidate debt will have a few options if they want to use their real estate asset, but it’s important that advisors consider all of these possible solutions rather than just the one they’re most familiar or comfortable with.
Re-mortgage for debt consolidation
One option will be to remortgage, take out a bigger loan so that they can erase all of those existing debts on credit cards, personal loans, etc. They only have one debt to settle, their mortgage.
It is certainly a simple option – there will only be one repayment date to watch out for, one interest rate to know. But there are some potential drawbacks that stem from the remortgage route.
The first, and potentially the most punitive, is the risk of having to pay prepayment charges. Advisors don’t need me telling them that the vast majority of their clients are likely to have fixed rate mortgages these days, and more often than not they are long. Given the way ERCs are calculated as a percentage of the mortgage loan balance, they can easily become a hefty cost if your client is only halfway through a five-year fixed rate. It’s an exit fee that is really going to sting on the exit.
Nor is it the only financial blow that comes from the remortgage. Your client will also have to change rates. It’s not a bad thing if they find themselves on a bad deal but given the level of competition we have seen in recent years, there is a real risk that they will have to switch to a less attractive rate, in especially if the additional borrowing moves their loan into a higher loan-to-value range. As a result, re-mortgage to erase those additional debts may mean that the client not only has to remit thousands of ERCs, but also switches to a higher interest rate, with a larger mortgage balance to boot. .
it doesn’t have to be like that
There is an obvious alternative, however, in the form of a second mortgage. And not only does a second charge provide a different route for borrowers, it actively avoids some of the potential drawbacks of refinancing.
It should be emphasized that a second mortgage is secured by the equity the borrower has in the property. As a result, the original mortgage is not affected by the loan. This means there are no worries about exit fees, moving LTV bands or changing interest rates – the client can continue with this first mortgage as usual and continue to benefit. of the excellent rate you have guaranteed him.
A second charge is separate from the original mortgage, which means that there is no unpleasant ripple effect resulting from the increased amounts required for debt consolidation.
Rising equity levels
It is impossible to ignore the considerable growth in house prices that has taken place over the past year as a result of the stamp duty holiday. This tax break has caused a lot of potential buyers to take the plunge and keep moving, and it has pushed up prices across the board.
In fact, the latest figures from the Office for National Statistics show that the average house price has jumped 10.6% in the 12 months ending in late August, which means a new average price of Â£ 264,000. . In monetary terms, this represents an increase of around Â£ 25,000 from a year ago.
And that’s great news for any borrower who is considering a second charge for debt consolidation purposes. This growth in prices means that they have a lot more equity in their property and are therefore in a better position to raise the funds needed to clear those debts.
The demand for help with debt consolidation will only increase in the months to come, so it is important for advisors to keep abreast of the full range of options available to their clients. If they’re not comfortable handling secondary costs on their own, now is the time to find a second charge specialist to partner with and who can help their clients find the best possible financing solution.