"Given the ongoing possibility of further Base Rate increases, homeowners struggling with debt may find a second charge mortgage beneficial."
As the reality of a Bank of England Base Rate of 5% sets in, borrowers’ spending habits are likely to face increased scrutiny. It’s hard to believe the last time we experienced a base rate of 5% was back in 2008.
While one might expect borrowers to reduce spending in times of higher credit costs, it’s interesting to note we haven’t seen this trend emerge. In fact, quite the opposite has occurred.
Over the past 15 years, we have grown accustomed to a culture of spending, aided by the low cost of credit. Even Nationwide Building Society’s May Spending Report indicates that breaking these spending habits has proven challenging.
Surprisingly, non-essential spending has experienced positive annual growth each month this year, including May. The Building Society attributes May’s growth to an extra Bank Holiday, with borrowers determined to enjoy a ‘summer of fun’ and considering holidays and outings as essential expenses.
Overall, non-essential spending in May increased by 4% compared to the previous year and month, with a 6% year-on-year rise in the number of transactions. The top non-essential expenses included airline travel, purchases from garden centers, and digital goods.
For essential and non-essential items, May’s credit card transactions also saw a 6% increase on the previous month; climbing 2% year-on-year.
Interestingly, separate data from Nationwide reveals the percentage of people concerned about their personal finances and ability to cover essential costs has dropped to 67%, down from last month’s peak of 74%. Around 16% of respondents reported improved finances due to pay raises and the benefits of previous cutbacks.
However, it remains an anomaly that 67% of borrowers express financial worries while non-essential spending continues to rise.
In this context, we anticipate second charge mortgages playing an increasingly important role in helping homeowners consolidate their debt when the need arises.
The latest figures from the Finance and Leasing Association (FLA) demonstrate the majority (59%) of new second charges in April were used for debt consolidation, while 22% were used for both consolidation and home improvement loans.
If non-essential spending continues to rise alongside increased credit card usage and higher interest rates, we are inevitably heading towards a scenario where borrowers run the risk of missing payments.
Recently released data from StepChange Debt Charity revealed 45% of mortgage holders (equivalent to 6.9 million UK adults) have struggled to keep up with bills and credit commitments in recent months. Alarmingly, two-fifths of mortgage holders show signs of financial difficulty, and approximately one in ten is estimated to be in problem debt.
Interestingly, the data indicates mortgage holders are more likely to exhibit signs of financial difficulty compared to the wider UK population. For example, 20% of mortgage holders are likely to have made just the minimum repayments on their debts compared to 16% of the wider UK population.
Moreover, an estimated 15% of mortgage holders have relied on credit, loans, or overdrafts to make it through to payday, while this figure stands at around 10% for non-mortgage holders.
As the media continues to emphasise the increased mortgage rates, even homeowners locked into fixed-rates of various durations may be already considering the prospect of higher mortgage payments in the future. Although the summer months often encourage carefree spending, there will inevitably come a point when some homeowners need to limit their spending on credit cards and loans.
Given the ongoing possibility of further Base Rate increases, homeowners struggling with debt may find a second charge mortgage beneficial. It has the potential to reduce monthly payments and help homeowners manage their finances in anticipation of potential future mortgage payment increases.
