Marie Grundy, Managing Director of Residential Mortgages and Second Charge
The theory books say there are four stages to every economic cycle: expansion, where the economy is growing; peak; contraction which often means recession; and recovery.
Where we are exactly in the cycle is up for debate, but you could make a convincing argument that we are currently in - or on the verge of entering - the contraction phase. While UK economy has so far managed to avoid recession, growth is flatlining and millions of households are struggling.
Inflation has been running above the Bank of England's 2% target for two years, the base rate is at a 15-year high, and the cost-of-living crisis is chipping away at disposable incomes. Understandably, this less-than-desirable combination of pressures is causing millions of households to struggle to make ends meet.
Financial Conduct Authority (FCA) data reveals that the number of people who have missed a bill in at least three of the past six months has risen by 1.4 million to 5.6 million. This is causing households to borrow more in order to meet their commitments. Recent Bank of England data reveals that credit card balances have soared by more than 12% over the past year. Separate research by Joseph Rowntree Foundation shows that 2.3 million households have turned to credit cards and other forms of debt to pay bills during the cost-of -living crisis.
While the level of arrears is still low by historical standards, this is also rising, another indicator that many households are struggling with the increased cost of living. The trade body predicts that the number of borrowers in arrears will soar by around 23% year-on-year in 2023. Therefore, it was unsurprising to see recent data from Knowledge Bank revealing that 'debt consolidation' and 'missed or late payments' were among the most common broker searches in June.
Offsetting payment shock
What does all of this mean for borrowers and those of us working in the mortgage industry? When the economy is struggling, we tend to see households tighten their belts and work to get control of their outgoings.
With that in mind, it is likely that more remortgage customers will be looking at debt consolidation as a way of offsetting the payment shock of refinancing onto a higher mortgage rate. This is a trend we're already starting to see to some extent. In May, 41% of remortgage customers withdrew further equity, up from 36% in January, according to UK Finance.
As any good broker knows, mainstream lenders have historically chased borrowers with the best credit records and who fit perfectly within their criteria. Those who have missed payments, have low credit scores or who have complicated or irregular income streams have historically been left to the specialist end of the market.
Many of the mainstream players often have more restrictive criteria for borrowers looking to consolidate. Specialist lenders, however, often repay the debt directly to unsecured creditors, which means that not only does the borrower eliminate the risk of paying unnecessary interest charges, but also that the debt being discharged are not included for affordability purposes.
Case by case
Given the facts, how many of the 2.4 million borrowers who will need to remortgage by the end of 2024 will fall foul of High Street criteria? Answering that is impossible, of course, but it's safe to assume there will be more - and probably a lot more, at that.
That's not a bad thing, as it will mean there will be increased opportunities to help borrowers looking to navigate their way through this period of increased living costs. Specialist lenders are more likely to offer bespoke underwriting, assessing each case on its own merits.
We're lucky that we have a thriving specialist lending scene in the UK - one that caters for all sorts of borrower types, providing they are deemed a worthy credit risk.
For that reason, while there will be plenty of borrowers out there ruing the position they are in, I am confident there are options out there for the vast majority. Because of that, I can see the specialist sector taking a bigger share of the market over the coming months.