Second charge borrowers looking to pay off costlier debts: Evolution

The last three months saw second charge mortgage borrowers returning to debt consolidation as cost of living pressures and interest rates continue to rise, according to Evolution Money's latest quarterly data tracker.

Evolution Money analyses data from two different types of second charge mortgage products, split between those borrowers using the loans for debt consolidation purposes only, and those clients who have prime credit ratings.

The latest tracker shows a slight reversal in previous iterations, with both the volume and value of second charge mortgages increasing for borrowers taking out these products purely for debt consolidation purposes, compared to prime borrowers who are able to use their loans for other purposes, not just debt consolidation.

Looking at its total lending data for the last three months, up until the end of February 2023, the product split by volume of mortgages is 70% debt consolidation/30% prime, and by value 61% debt consolidation/39% prime.

Evolution Money said this move towards a greater level of activity amongst debt consolidation borrowers was understandable given the increased cost of living pressures but also the need for many borrowers to pay off costlier debts which might have been subject to increased interest rates in recent months.

The lender also said homeowners were increasingly likely to look at second charge mortgage options, especially if they did not want to disturb their existing first charge mortgage. Remortgaging right now away from a first charge was likely to result in far higher monthly payments given the rise in rates over the last six months.

Evolution said existing homeowners were therefore likely to continue to look for short-term alternatives such as second charge mortgages in order to pay off non-secured debts running at far higher interest rate levels.

This iteration of the tracker bucks the recent trend whereby the average loan amount for debt consolidation purposes had continued to increase, and was over £25,000.

Over this three-month period the average debt consolidation loan amount has fallen by close to £1,000, while the average term has increased to 138 months and the average LTV has increased to 70%. Borrowers continued to consolidate more debts than their prime borrower counterparts, however the average value of debts consolidated had fallen to £17,403 from £18,322.

Evolution said these drops might reflect a borrower demographic focusing on the debt they wanted to pay off specifically, not taking out loans beyond this amount, while also giving themselves extra time in order to pay off their second charge.

Evolution data also shows the most common uses of a debt consolidation second charge mortgage. 55% were using the money to pay back a loan provider, followed by over 34% paying a bank – an increase since the last iteration – while 5% were paying off retail credit.

For prime borrowers, the average loan has also fallen to just over £36.5k from over £37k, with the average term also increasing to 164 months, with the average LTV dropping to 66%.

Prime borrowers continue to take out second charge mortgages for debt consolidation (holding at 68% again this quarter), home improvement (11%) and home improvement with some consolidation (up to 16%).

Steve Brilus, CEO of Evolution Money, commented: “Once again, it’s possible to extrapolate what is happening in the wider economy from our Second Charge Mortgage Tracker, particularly when it comes to why homeowners are opting for a second charge mortgage rather than a straight remortgage, and also why we have seen a noticeable uptick in debt consolidation loans, and prime borrowers continuing to use their loans for the same purpose.

“Last year the Tracker reflected an increase in the number of prime borrowers using second charge mortgages, and while this remains steady, it’s also obvious that we are beginning to see a move back towards debt consolidation right across the piece.

“This is likely to have a lot to do with the direction of travel for interest rates. As they have risen, other forms of debt have become costlier to service, plus of course the attractiveness of remortgaging a first charge mortgage in order to release equity to potentially pay off these debts becomes less so, given the likelihood borrowers would be moving to a much higher rate.

“For those that can, it therefore makes sense to maintain the existing first charge and to look at second charge options in order to pay off those costlier debts.

“It’s also noticeable that we have seen a slight move downwards in terms of average loan amounts and again this might reflect the focus on just opting for a loan amount based on what is required to pay off the debt, rather than potentially taking a large loan, and for prime borrowers at least, using this ‘extra’ money for different purposes not just debt payments.

“Certainly, it has been a busy start to the year and we fully anticipate that seconds will continue to be in demand over the course of 2023 and beyond. Rates look unlikely to come down significantly in the short-term and there is a real possibility they will go up further.

“In that scenario, paying off debts - which are likely to be costing even more - with a second charge mortgage becomes an even more attractive option and it is certainly a product that advisers should have in their advice kit bag.”