Illustrations show that by opting for a credit card instead of a second mortgage, homeowners could wind up paying almost £20,000 more in interest for the same debt.
Improve instead of move
More than 800,000 mortgaged households plan to take on this debt, with 26% planning to carry out home improvements followed by 22% who want to consolidate their existing credit commitments.
The survey, carried out by Pepper Money, highlights a trend of improving homes rather than moving to a new pad.
The specialist lender’s findings show that 53% are choosing credit cards as the main way of financing improvements, which it says raises concerns that homeowners will be saddled with high interest payments as a result of consumers’ limited awareness of other options.
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In the dark over second charges
More than two in three or 67% of mortgaged homeowners have never heard of second charge mortgages and how to reinvest their property wealth.
Ryan McGrath, director of second charge mortgages at Pepper Money, said: “It’s vital that people don’t sign up to unnecessary costs when they’re tackling home improvement projects.
“Our research shows credit cards continue to be the default option for thousands of homeowners looking to borrow over the next year, but this isn’t always the most cost-effective option when you consider interest rates, repayment terms, and length of a loan.”
Cheaper funding costs
Homeowner loans, or second charge mortgages, are a little-known but often sensible way to fund such projects, adds McGrath.
He says they can offer more competitive rates and lower monthly repayments than unsecured borrowing.
A typical second charge loan of £16,447 over five years at an average rate of 9.6% would incur £4,325 in interest, with monthly repayments of £346 and total repayments adding up to £20,772, according to Pepper Money.
If a homeowner borrowed the same amount on a credit card at 24.58%, the same monthly repayment of £346 would leave the homeowner making repayments for nine years and eight months to pay off the debt, with £23,391 of interest incurred before the balance was cleared in 2034.
“While a second charge mortgage isn’t right for every circumstance, I would urge anyone contemplating home renovations to look into whether a secured loan could be for them and talk to a broker,” he added.
Double-digit lending growth
The number of new second charge agreements completed in July totalled 3,364, 25% higher than the same month last year, data from the Finance and Leasing Association (FLA) revealed.
The trade association’s data showed that there was a 30% annual jump in the value of new business, which amounted to £163m.
However, the number of employees offering second charge advice has fallen by 10% to 11,220 in 2023 compared to pre-pandemic figures in 2019, Specialist Lending Solutions understands.
