I recently had the opportunity to present to a group of seasoned brokers.
Everyone in the room had over a decade of experience.
As the discussion shifted to current market conditions, the brokers voiced how difficult it had become to secure new business. They acknowledged that protection was a key income source, and many were aware that the specialist lending sector was rapidly expanding to meet the growing needs of more complex borrowers.
I posed a question to them: “Can you do your job with your eyes closed?” The unanimous response was: “Yes.” I then followed up with: “Have you ever thought about doing it with your eyes open?”
Incorporate second mortgages into your toolkit
The room fell silent. There were a few surprised looks, some nods, and even one person pretending to shoot me with their fingers. I took that as a sign they were on board. It was time to dive into second charges.
Household debt
Household debt in the UK continues to climb, with mortgages and personal loans contributing significantly.
Although figures for the final quarter of 2024 are not yet released, consumer credit is expected to have totalled approximately £200bn for the year, including credit cards, personal loans and car loans. Mortgages account for the largest share of this, with mortgage debt surpassing £1.7trn.
You can offer your clients more choices while simultaneously increasing your revenue potential
The Finance & Leasing Association’s latest survey predicts that new consumer finance business will reach £114bn in 2024, despite continued pressure on disposable incomes. While inflation has moderated and interest rates are expected to fall in 2025, many consumers are still struggling with high unsecured debt.
Retail store credit, credit cards and car finance remain the dominant sources of unsecured credit, and these can be difficult to repay due to their high interest rates — 21% for standard credit cards and 25% for store cards.
Take an American Express credit card offering Avios points if you spend £6,000 in the first three months. The APR is a staggering 138.5%, which can leave consumers struggling to manage the debt they’ve accumulated.
The key insight I share with brokers is to understand the policies of the top-six lenders when it comes to debt consolidation
Such situations often prompt borrowers to explore ways to restructure finances, and debt consolidation could be a solution. But the level of debt may be too high for unsecured loans to be a viable option.
So, what are the alternatives?
IVA/debt management plan?
For some clients this is a useful option. In 2024, more than 100,000 new individual voluntary arrangements (IVAs) were initiated in the UK, helping many to manage their debt. However, IVAs can create barriers when trying to arrange competitive finance rates in the future and should be approached with caution.
Remortgage or further advance?
This too is a potential option, but there are common challenges, such as low interest rates that could result in transferring debt onto a higher rate, large early redemption charges, and caps on further borrowing for interest-only mortgages.
The key insight I share with brokers is to understand the policies of the top-six lenders when it comes to debt consolidation. Many brokers, surprisingly, are unaware of these details.
When consolidating unsecured debt, many first charge lenders treat this as part of the affordability assessment, which often results in ‘double counting’ the borrower’s monthly commitments. However, second mortgages don’t have this issue.
We frequently assist clients with both debt consolidation and capital raising for a variety of purposes
I’ve seen many clients declined after passing the initial affordability check, only to fail when the purpose of the loan is debt consolidation. After reviewing lender policies regularly through Knowledge Bank, I’ve identified several reasons why clients get declined:
- Any part of the mortgage is interest-only;
- Debt consolidation exceeds 49% of the additional borrowing;
- LTVs are capped — one top lender limits to 80% LTV;
- Loan value is capped — one top lender caps at £50,000;
- Debt consolidation must not exceed 50% of the applicant’s gross income; and
- LTI caps are based on household income, with many lenders capping at a lower amount.
Second charge mortgages, however, don’t impose these same restrictions, which makes them an attractive alternative.
We frequently assist clients with both debt consolidation and capital raising for a variety of purposes, such as second homes, weddings or business investments.
Consumer credit is expected to have totalled approximately £200bn for the year
By incorporating second mortgages into your toolkit, you can offer your clients more choices while simultaneously increasing your revenue potential.
With second charges, you truly have your eyes open to a broader range of options.
Paul McGonigle is chief executive officer of Positive Lending
This article featured in the February 2025 edition of Mortgage Strategy.
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