Debt consolidation dominating second charge value and volume

According to Evolution Money’s latest quarterly data tracker, which split borrowers by debt consolidation borrowers or prime borrowers, this is a slight increase from the prior quarter when debt consolidation borrowers made up 68 per cent of volume and 59 per cent of value.

The lender said the move towards debt consolidation was “understandable” due to rising cost of living as well as the need for borrowers to pay off costlier debts fueled by interest rate rises.

Evolution Money added that homeowners were more likely to look at second charges as they may not want to touch their existing first charge mortgage.

It explained that remortgaging would lead to high monthly payments due to mortgage rate rises over the last few weeks.

The lender said existing homeowners were “likely to continue to look for short-term alternatives”, such as second charges to pay off non-secured debts that were rising due to higher interest rate rises.

‘We fully anticipate that seconds will continue to be in demand’

The average loan amount for debt consolidation borrowing fell quarter-to-quarter, going from £25,178 to £24,183.

For prime borrowers the average loan amount also decreased from £37,170 to £36,251.

The average term in months for a debt consolidation borrowers is 138 months, which is an increase from 135.

Prime borrowers’ average loan term went from 158 months to 164 months.

The average loan to value for both borrower types stayed roughly stable at 70 per cent for debt consolidation borrowers and 66 per cent for prime borrowers.

The average number of debts consolidated was also in line with previous quarter figures at six for debt consolidation borrowers and five for prime borrowers.

The average value of debts consolidated decreased from £18,322 to £17,403.

Prime borrowers’ average value of consolidated debts went from £24,422 to £23,344.

The most common use for debt consolidation second charge was to pay back a loan provider at 55 per cent, 34 per cent for paying a bank and five per cent paying off retail credit.

Around 68 per cent of prime borrowers used second charges for debt consolidation, 11 per cent for home improvement and 16 per cent wanted home improvement with some consolidation.

Steve Brilus, CEO of Evolution Money, said last year the tracker had shown an increase in the number of prime borrowers using second charges, and whilst this was “steady” there was a “move back” towards debt consolidation right across the piece.

He continued: “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.”

Brilus said it was “noticeable” that there had been a “slight move downwards” in average loan amounts and this could “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,” he noted.