Homeowners are increasingly looking for ways to pay off more expensive debts, according to data from the latest second charge mortgage tracker from Evolution Money.
The quarterly tracker for December 2022 to February 2023 shows an increase in activity from debt consolidation borrowers. The split by volume of mortgages is 70% debt consolidation and 30% prime, and by value it’s 61% debt consolidation and 39% prime.
This compares to the previous quarter’s 68% volume in debt consolidation, 32% prime and 59% value in debt consolidation, compared to 41% prime.
Evolution Money says this move towards a greater level of activity among debt consolidation borrowers is ‘understandable given the increased cost of living pressures’, at the same time as the need to pay off other debts which have likely become more expensive due to interest rate rises.
While data from the latest quarter shows a slight reversal in the volume and value of loans for debt consolidation borrowers, the lending specialist says this could be due to people focusing specifically on the debts they want to clear, rather than taking out additional amounts. At the same time, borrowers are giving themselves a little more time to pay back their second charge loans.
The average debt consolidation loan amount over the quarter fell from £25,178 in the previous quarter, to £24,183. The average term increased to 138 months from 135 months with a small rise in loan-to-value from 69% to 70%.
The most common uses for a second charge debt consolidation mortgage were paying back a loan (55%), paying a bank (34%) and paying off a retail card (5%).
For prime borrowers, who are able to use their loan for other purposes as well as debt consolidation, the average loan amount fell from £37,170 to £36,521, with an increased term of 164 months (up from 158) and a reduced LTV of 66%, down from 68%.
However, in an indication of ‘debt consolidation across the piece’, prime borrowers also continue to use their second charge mortgages for debt consolidation, with 68% using it for this reason.
Evolution Money chief executive Steve Brilus says: “Once again, it’s possible to extrapolate what is happening in the wider economy, particularly when it comes to why homeowners are opting for a second charge mortgage rather than a straight remortgage, and also why we have seen a noticeable uptick in debt consolidation loans, and prime borrowers continuing to use their loans for the same purpose.
“Last year the tracker reflected an increase in the number of prime borrowers using second-charge mortgages, and while this remains steady, it’s also obvious that we are beginning to see a move back towards debt consolidation right across the piece.
“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.”