Research carried out by Pepper Money with YouGov has found a quarter of people in the UK say that the amount of personal debt they have has increased as a result of COVID-19.
What’s more, the same research uncovered that 40% of adults who have experienced adverse credit in the last three years have more than £5,000 of outstanding unsecured debt.
The cost of interest payments on unsecured debt, such as personal loans and credit cards, can soon become significant – meaning that many customers get stuck in a cycle of simply servicing the debt without reducing the balance.
Why consider remortgaging for debt consolidation?
This is why remortgaging for debt consolidation may prove a sensible option for some and by raising extra capital to pay down their debts, customers can often significantly lower their monthly payments.
There are, of course, considerations in converting unsecured debt to one that is secured on a customer’s home but, in the right circumstance, a debt consolidation remortgage represents best advice for the client. And with so many people having increased their debt burden over the past year, it’s likely that almost all brokers are going to work with customers where this is a consideration.
Sourcing the right debt consolidation remortgage for your clients, however, may not be as straight forward as you first think. The widespread restriction of lending at higher LTVs has been well-documented and has probably impacted some of your clients. Often a debt consolidation remortgage will require a higher LTV to allow for the capital raising and even where lenders have returned to higher LTVs, many limit the LTV when remortgaging for debt consolidation.
Similarly, it is common for a lot of lenders to include a debt to income ratio as part of their affordability assessment. This could limit a customer’s ability to borrow the amount they require to pay off the debt, simply because that debt is factored into their affordability calculation.
The role specialist lenders play in remortgaging for debt consolidation
However, specialist lenders are often specialists in debt consolidation, which means they are able to remove these hurdles, whilst still making a full and robust affordability assessment. For example, at Pepper Money, we allow capital raising for debt consolidation up to our maximum LTV, we don’t apply a debt to income ratio, and we don’t credit score.
As a result, we frequently work with customers who may consider themselves as having mainstream circumstance, with a clean credit record, but whose options for debt consolidation are limited in the mainstream market due to ‘over-indebtedness’.
Used correctly, debt consolidation is an important tool to help brokers put their customers in a stronger financial position – and the best options don’t always lie on the high street. So, when you think about debt consolidation, think about taking a specialist approach.
Paul Adams, Sales Director at Pepper Money