Following recent data from the Bank of England which suggested credit card borrowing rose to a monthly high in November, advisers said clients were seeking workarounds in the face of reduced options.
Rewarding debt
Payam Azadi, director and partner at Niche Advice, said the problem with modern society was that debt had been “rewarded”. He said this was an issue even for high earners, who tended to have larger obligations which matched their lifestyles.
He added: “It’s very rare that you’ve got someone who’s a high earner who doesn’t have high expenses to go with it.”
Azadi said because of this when there is a financial shock to the system, such as a higher cost of living, this has a larger impact on people’s finances. Similar to mortgages, rates on unsecured borrowing have risen, Azadi said, and in terms of property this impacted loans taken through the Help to Buy scheme.
“From day one, they couldn’t afford the property, they got a government incentive. But they were paying one and a half per cent interest rate to cover their own mortgage rate of two per cent. Now they’re coming out of that, and they’re paying four and a half or five per cent rates.”
“The system was encouraged, everyone’s encouraged to take on debt, whether it’s unsecured debt or secured debt.”
Nicola McKenzie, co-founder of Dunham McCarthy, had not seen a trend in people taking on more unsecured debt but regarding Help to Buy, came across a borrower who delayed their decision to refinance which ended up being costly.
By the time the client decided what she wanted to do, it was the week after the mini Budget.
McKenzie said: “She was planning to remortgage to repay her Help to Buy loan, then rent the property out to a tenant. We struggled to find a lender that would agree to this with the exception of BM Solutions, most wanted her to have been out of the property for at least six months.
“We found a lender that would agree to it, but they said that they’d want the property to be rented out or she had to have a tenancy agreement in place.”
The affordability was okay at first but due to the market disruption, she ended up falling outside of it.
As the client had already found someone to move into the property, it was not as simple as moving back in and repaying the loan herself.
McKenzie said there was another instance where unsecured borrowing had limited a client’s options. The client had also used a Help to Buy loan and by the time it came to refinancing, their level of unsecured debt had risen, and they had a fourth child.
In this case, the client was able to do a product switch, but McKenzie said the change in circumstances had “prevented them from going elsewhere”.
Consolidating debt
Azadi said this led to people looking to consolidate their liabilities by rolling it up into their mortgages, which he said could be “a very dangerous thing to do”.
He added: “What you’re doing is rolling an unsecured debt such your credit card – no one’s going to come and repossess your house for that – but then you roll it into a mortgage. The rate was seven per cent or nine per cent, but you were going to pay it off within three years. You’ve now chucked it on a mortgage for 25 years.”
However, Azadi said this was always not a bad decision for everyone as some may not want to default and later impact their mortgage options but he said this raised the need for good advice.
“That’s where mortgage brokers are really having to earn the money now, because it’s not one size fits all. And everyone wants to try to standardize debt consolidation and dealing with debt. But it is very, very individual,” Azadi added.
Darryl Dhoffer, mortgage and protection consultant at The Mortgage Expert, said unsecured debt was stable among his clients in 2022 but it was “alarming” that more were taking on secured debt to clear this. He said this had “boomed the second charge market” and predicted that 2023 would see the highest amount of activity for this loan type.
He said it was also worrying that because most lenders were not keen to secure unsecured debts through a remortgage or further advance, clients were selecting interest-only loans.
Dhoffer added: “Rules need to be relaxed at least while high inflation is around.”
From his understanding, Dhoffer said the government had interest-only options with lenders to assist clients in need, but this was not widely publicised and seemed to be available on a case-by-case basis. He said clients were required to contact lenders directly, which he said “may not be the best advice”.
A buoyant specialist market is needed
Azadi said although specialist lenders tended to help people with adverse credit secure a mortgage, the current offering was not competitive. He recognised that there were various reasons for this, including funding costs, but said their rates and affordability were not competitive.
He added: “This is very important. We want a buoyant, dynamic, specialist sector to be able to deal with those people. Because otherwise, those people who have been on a mortgage with a one and a half per cent rate, who have now racked up a couple of defaults and credit card debt, all of a sudden their options will be to go on a seven or eight per cent rate.”
Dhoffer also called for lenders to widen mortgage options for borrowers who had recently discharged a debt management plan (DMP) to align closer to the choice available to those with a historic individual voluntary arrangement (IVA).
Referring to data from The Money Charity, Dhoffer said the use of both agreements had risen with 31,099 IVAs registered between August and October last year, an 8.1 per cent annual increase.
He said there were only a handful of lenders willing to lend to borrowers with a recently discharged IVA and most asked for a deposit or equity of 30 to 40 per cent.
Dhoffer said: “Higher loan to value (LTV) products for recently discharged IVA clients need to be made more available by all specialist lenders, not just a couple, especially if active DMPs are widely more accepted, with a 12m track history.
“There is an unwanted section of recently discharged IVA clients that need mortgages – hugely underserved. They just need lenders with the appetite to come in with 85 per cent LTV products for remortgage and purchase.”
