Data out this week from Citizens Advice revealed that households across the UK are currently dealing with a total of £22bn of debt, with one in four households now behind on at least one bill.
The charity said that it was helping around 40,000 people a month with debt issues.
One tactic which can be employed by those struggling with debts is to consolidate them using their property, with many brokers telling Mortgage Solutions there had been a spike in demand for debt consolidation.
How debt consolidation is spiking
Steven Morris, advising director at Advantage Financial Solutions, suggested there were three areas where debt consolidation had spiked: the number of clients considering it, the amount requested, and the debt-to-income ratio.
“We have seen some people looking to consolidate more than their annual income, with balances as high as £100,000,” he continued.
Samantha Bickford, mortgage and equity release specialist at Clarity Wealth Management, said she had seen a spike in clients remortgaging with an element of debt consolidation involved, and argued it can remain a “logical option” even with the higher interest rates on offer today.
She gave the example of a recent client who consolidated around £40,000 in debt from loans and credit cards onto their property, which had cut their outgoings by around £800 a month, a move which had been “life changing” for them.
James Miles, director at The Mortgage Quarter, said he had seen a host of borrowers opting to consolidate their high car finance payments, which were traditionally managed separately.
He added: “The significant impact of these consolidated payments is becoming increasingly apparent, providing much-needed breathing room for individuals seeking to regain control of their finances where they have over committed.”
Beating affordability
According to Justin Moy, managing director at EHF Mortgages, there are plenty of clients who would “ideally like to refinance” but are caught out by affordability issues, lender appetite and reducing property values.
Moy argued that the economy has been “artificially fuelled” by remortgages with debt consolidation every couple of years, at a time when property values were constantly increasing and boosting confidence in the process. However, this has ground to a halt and is now hitting borrowers hard.
Laura Bairstow, founder of The Mortgage Masters, said there had been a “noticeable increase” in clients looking to release equity in order to consolidate debts.
She continued: “Due to rate increases, when it comes to remortgaging, clients are then having to consolidate debts and/or increase the loan term to reduce their monthly outgoings for affordability purposes.”
What other option is there?
Rhys Schofield, brand director at Peak Mortgages and Protection, said it was unsurprising enquiries for debt consolidation have “increased hugely” in the last year, noting that for many it was the “only way to make ends meet” even accounting for the fact that mortgage payments will likely be far higher.
Gary Bush, financial adviser at MortgageShop.com was another broker to report an increase in discussions around debt consolidation, and said that some clients felt that the prospect of lowering their monthly repayments ‒ even if it meant paying more in the long run ‒ would “help the sinking feeling they have”.
He added: “As long as they learn from this situation and don’t simply come back a couple of years later in trouble again, debt consolidation can work out as a lifeline for clients.”
It’s not just cost of living
Ranald Mitchell, director of Charwin Private Clients, said that the levels of debt clients are looking to consolidate can vary enormously, from small amounts to tens of thousands of pounds.
“The cost of living is a driver behind some of this, however poor money judgement can also be responsible. A client recently took out over £80,000 in credit cards for home improvements, mostly at low-interest rates, a well-principled approach, only to find they could not remortgage as intended.
“Their credit scores plummeted due to high usage of credit in a short space of time, and the debt had to go to past remortgage affordability.”
Missing the bigger picture
The attitude of the mortgage market towards the situation was a worry, argued Morris.
“Some networks forbid debt consolidation in lots of scenarios, on the basis that they don’t want to expose themselves to being sued for misadvice. For a significant minority of mortgage holders, consolidating debt may be the only way to keep making payments.
“Let’s be frank: debt consolidation causing more interest being paid over the term pales in comparison to being repossessed.”
Looking to specialists
The fact that many high street lenders have limits over the debt-to-income ratio or how many commitments can be consolidated has meant some clients need to work with complex lenders who assess the case manually, suggested Emma Jones, managing director of WhenTheBankSaysNo.co.uk.
She added: “The advice always remains the same, namely to be careful about securing debts over a longer term, but for some clients, this is a way of maintaining their outgoings.”
Bickford picked out lenders like The Mortgage Lender, Pepper and Vida as names who are proving useful for those clients with some level of adverse on their credit profile.
She added that while high street lenders are an option for those clients without missed payments, the fact that they disregard the existing debt repayments which are due to be consolidated when determining the debt-to-income ratio can provide a challenge.
“It is a case of reviewing the client’s circumstances and ensuring the best lender is matched to the client to find the most suitable deal,” she concluded, which only emphasises the importance of brokers.
Moy also pointed to specialists, stating: “Inevitably, specialist lenders will become more important to the wider market, as payments are missed to prioritise living costs, taking borrowers away from high street banks.”
The alternative of interest-only
However, not all brokers are seeing a jump in debt consolidation enquiries.
Aaron Strutt, product and communications director at Trinity Financial, said that while his firm had seen some interest in debt consolidation, it was no different from usual.
He agreed that higher rates are making life difficult for borrowers, particularly for those coming up for renewal in the next year, while some of those on expensive standard variable rates are stuck, unable to remortgage due to affordability issues.
Strutt continued: “We are speaking to more borrowers who want to switch to interest only. The Mortgage Charter won’t last forever, so when mortgages come up for renewal many are switching lenders and often to those providers with more lenient acceptance criteria.”
