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Are you giving suitable advice when recommending debt consolidation? We often see mortgage files with clear evidence that the customer is making a monthly payment saving and the relevant warnings have been given regarding unsecured to secured, total cost may be higher etc but this by itself is not sufficient.
You must be able to evidence suitability, show that you have explored all the options available and detail why you have concluded that debt consolidation is both appropriate and essential. In order to do this you should have a complete picture of the customer’s credit commitments, including current balances, rate, payments and term remaining. Obtaining the customers reasoning behind wanting or needing to consolidate the debts will help establish if it’s essential.
Some firms issue a second illustration excluding debt consolidation, a useful tool if used correctly. Simply comparing illustrations with and without the additional borrowing will only show the total cost difference by adding the debts to the mortgage, but unless the customer has been provided with the total interest they will pay by maintaining the debts and factor this figure in they won’t have an accurate comparison.
The accurate way to establish the cost implication is to compare total interest cost of debts before consolidation and then those same debts based on the mortgage rate and term, by using a debt interest calculator for example.
Do you always need to go into so much detail? Possibly not, it all depends on the circumstances, it could be deemed essential so the additional interest that could be payable would be easily outweighed by the fact the customer has to consolidate, such as the need to relocate for work etc. Providing figures will ensure the customer has all the facts but isn’t likely going to have any impact on the advice as in this example without consolidating the customer may not be able to obtain the mortgage needed to relocate for the new job.
Some points to consider:
- Its generally not advisable to consolidate zero rate debts or debts with short terms remaining, for the main reason being these debts will cost the customer a lot more over the term of the mortgage
- Consolidation needs to be seen as essential, it’s not acceptable to just state the customer is paying less per month if the customer could quite easily afford to maintain payments - remember you the broker makes the recommendation and so you must ensure suitability
- Treat each debt individually, some debts may actually benefit from being consolidated on the mortgage, simply consolidating everything without looking at the figures is not treating the customer fairly
- Explore all options, whilst it may be deemed essential to consolidate the debts this doesn’t automatically mean a mortgage is the best way of doing this. Other options such as an unsecured loan or second charge mortgage may be better options, one has the benefit of remaining unsecured and both give the option of stating a term which is shorter than the mortgage term. The mortgage could over 25 yrs and the loan over 10 yrs, so less interest is paid. It’s not always as simple as the second charge mortgage may have a higher rate or charges resulting in the overall cost being more.
- Establishing the total interest charged by maintaining or consolidating a debt will help evidence any decision making.
The most important thing to remember is the file should clearly evidence debt consolidation was suitable advice and demonstrates the options explored and the reasoning behind any advice given.
If you are unsure if your doing enough to satisfy the FCA and the FOS on debt consolidation files then please get in touch, we have template documents to help and can provide one off file checks to give honest feedback to ensure you’re doing enough, and to give you peace of mind.