Consolidating debt with secured charges

As the cost of living continues to soar and inflation sits at a 30-year high, many homeowners are starting to feel the pinch as the aftermath of the pandemic and the ongoing effects of the war in Ukraine continues to place a strain on household finances.

Economists predict the situation will get worse before it gets better, and for many people, this means a decline in living standards and increased pressure on household finances. In addition, some homeowners have emerged from the pandemic with significant levels of debt which they need to pay off. This is only adding further fuel to the fire.

Faced with the sharpest rise in living costs for at least three decades, homeowners with expensive debt such as credit cards and unsecured loans may find themselves struggling to make ends meet as monthly repayments start to rise at the same time as utility bills and other household expenses.

For brokers with clients struggling with debt repayments or for those simply looking to free up a bit more cash every month to combat the squeeze, it may be worth considering consolidating the debt by taking out a second charge mortgage and borrowing against the equity in their home.

This will allow clients to pay off any outstanding credit card or unsecured debt they currently hold and get them back on an even keel. It may also help them to better manage their finances by reducing the number of monthly payments outstanding, making budgeting more feasible.

For those homeowners who have benefited from the rapid rise in house prices over the last few years, taking out a second charge mortgage is a useful tool to consolidate debt as they may be able to borrow more than with other credit options, particularly if their house has significantly increased in value.

Using a second charge mortgage for debt consolidation also means that homeowners are able to keep their first mortgage in place. This means they will not incur any early repayment charges and can access the funds quickly. There will also be no need to agree to new, possibly less preferable payment terms and as the second mortgage will be for a smaller amount, with the debts paid off, managing any future increases in monthly living costs may be more manageable.

This is particularly pertinent in the current climate of base rate hikes and soaring inflation as it means that low and preferential rates on their current mortgage will not be lost through remortgaging. This will also prevent a further increase in monthly repayments, which would only serve to exacerbate the situation even further.

Second charge mortgages can prove to be a useful tool for brokers with clients where remortgaging isn’t feasible or the best advice for their current circumstances, as they offer a cost-effective way to raise finance for debt consolidation.

By using a second charge mortgage to unlock the equity in their home to pay off existing debt, homeowners can consolidate their mortgage repayments into two separate monthly amounts, hopefully putting them back in control of their finances and helping to alleviate some of the pressure faced increased living costs.