The rising cost of living is cropping up more frequently in client discussions, brokers have said, with debt consolidation through remortgaging potentially affording borrowers additional breathing space to deal with inflation.
This week Andrew Bailey, governor of the Bank of England, admitted that “there isn’t a lot we can do” about inflation increasing further this year, potentially to as much as 10 per cent. The consumer prices index (CPI) measurement of inflation is already at seven per cent, its highest level in 30 years.
And brokers have told Mortgage Solutions that inflation is taking on a growing importance in the advice process, with some borrowers concerned about overstretching themselves.
Rate increases only make situation worse
Inflation is the “hot topic at the moment” when completing budget planners with clients, according to Rhys Schofield, managing director at Peak Mortgages and Protection.
He noted that while some breathing space is always included in these plans, it is getting “eaten up”, adding that hiking interest rates will not help as the price rises we are seeing are “not homegrown but global”.
“All rising interest rates are doing is making something already really painful for households even worse, so the powers that be are able to say they tried to do something,” he concluded.
Clients unwilling to max out borrowing
Imran Hussain, director at Harmony Financial Services, said that over the past six months conversations with clients have centred not only on how quickly rates are likely to rise, but also the increasing cost of living and how this will impact the amounts clients can borrow.
He added that he was seeing clients unwilling to max out their borrowing potential which Hussain suggested was likely a sign of things to come.
Can I borrow enough?
Conversations around inflation aren’t typical, according to Scott Taylor-Barr, financial adviser at Carl Summers Financial Services, though he said there have been far more discussions around rising interest rates and speculation of a potential house price crash.
He added: “The concern being shown is more about whether they will be allowed the mortgage they need to buy the house they want and will they lose money, rather than concern at being able to afford the house and its associated bills.”
Taylor-Barr noted that lenders’ affordability calculations will start to have an impact on the maximum loans available for given incomes, as the underlying living costs built into those calculators start to rise.
He added: “We have recently had an email from Coventry Building Society to advise brokers that they are reviewing the living costs built into their calculator currently, and we’re expecting others to follow suit.”
However, he noted that Nationwide’s move to increase the maximum mortgage cap to 6.5 times gross income in certain cases ran counter to this, which demonstrated that lenders are looking to find ways to work around the potential impacts of inflation on borrowers.
Consolidating debt can help free up breathing space
Lewis Shaw, founder of Shaw Financial Services, said it was clear that the “scourge” of inflation was not only here to stay, but actually getting worse.
He added that he has argued for some time that consolidating debt through a remortgage, combined with extending the mortgage term, may be suitable for some clients who need additional breathing space during the cost of living crisis.
“By consolidating debt, you’re securing unsecured debt against your home, reducing equity and potentially paying more interest overall than you would have done,” he continued.
Rob Peters, principal at Simple Fast Mortgage, said brokers had a role to play in trying to keep client borrowing costs low, not only by making sure they are on the best deal possible but also looking at the potential consolidate debts to free up surplus income.
He continued: “Equally important is making sure clients have the right type and amount of protection in place, such as life cover critical illness and income protection.
“With things already getting tight, a death, accident or serious illness preventing work and therefore income, could be financially catastrophic for families, and the importance of well rounded financial advice has never been higher.”
All about preparation
Paul Neal, mortgage and equity release specialist at Missing Element Mortgage Services, said it was all a question of preparation, with many more clients now opting for five and 10-year fixed terms.
He added: “Yes rates could shoot up, but if you have been sensible and engaged with a broker, your rate should be fixed for X number of years, so it isn’t something to be concerned about till closer to the time.”