Debt consolidation drives second-charge mortgage growth

The subprime mortgage market has seen continued growth, with a monthly increase of 54 percent in April – up 83 percent from a year earlier.

Monthly figures released by the Finance & Leasing Association (FLA) have shown that the value of new business reached £127m in April this year, with 2,802 new contracts.

Of this, 53 percent was for consolidation of existing loans, 16 percent for home improvement, and another 25 percent for both loan consolidation and home improvement.

Andrew Fisher, chief commercial officer at Freedom Finance, said he expects that continued growth to accelerate over the course of the year as the current economic environment may prompt people to take advantage of real estate equity after the pandemic has boomed home prices .

“This has allowed more homeowners to look to second mortgages to leverage the value of their property for other purposes. For example, they can now use second-rate mortgage loans to fund home improvement jobs like installing a home office, improving the property’s insulation, or installing greener energy sources like solar panels.

“As the cost of borrowing rises and household budgets are squeezed, debt consolidation is likely to be another key issue in the current inflationary shock, and second mortgages can be a timely and cheap way to pay off or reduce existing debt.

Fisher added: “With the recent rise in interest rates and possible further rate hikes by the Bank of England, those with longer-term commitments may be reluctant to take out a new mortgage as they would likely switch to a more expensive rate and may also face a mortgage that is too high.” Prepayment Penalty – Second-charge mortgages meet the needs of these customers very effectively.”

Spellman Financial Services financial adviser Luke Spellman said that in recent months he’s seen a large number of applicants wanting to free up equity, with notable reasons such as debt consolidation and home improvement, which he believes “come with the rising cost of living.”

Spellman said, “The reason applicants are likely to turn to second-rate mortgages rather than receive further advances from their existing lender could be because applicants do not meet affordability or credit criteria with their existing lender.”

Earlier this month (June 2022), LV released figures showing that 12 percent of retirees had outstanding mortgage debt when they retired, while a third of mortgage holders do not believe they will have their mortgage paid off by age 65.

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