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January 2020 | Adverse

Paul Adams: The right mortgage for a client in a DMP

Paul Adams is sales director at Pepper Money

The Office for National Statistics (ONS) has recently published the sixth round of its Wealth and Assets Survey, which includes detailed information on household debt between April 2016 and March 2018.

During this period the ONS says that total financial debt, excluding property debt, rose from £107bn to £119bn – an increase of 11%. 

The ONS says this was driven by a combination of both an increase in the number of households with financial debt, which increased from 12.4 million to 12.7 million, and increasing levels of financial debt. 

Median household financial debt during this period rose from £4,000 to £4,500 – an increase of 12%. And mean household financial debt also rose, from £8,600 to £9,400 – an increase of 9%.

The ONS says that, of all adults with financial debt, 14% considered their financial debt to be a “heavy burden” and a further 30% considered it to be “somewhat of a burden”.

This comprehensive report is just the latest in a series of published research from various sources that evidence the increasing indebtedness of people across the UK and so it is perhaps unsurprising that one of the most popular criteria searches for brokers searching for Pepper Money on criteria based sourcing systems is for clients in active Debt Management Plans (DMPs).

A DMP is an agreement between an individual and their creditors to pay debts. It is typically used when borrowers can only afford to pay less than their contractual repayments each month and it is usually a proactive step that is taken by borrowers to manage their debts when they can see that they are heading into trouble. The FCA has said that there are approximately 400,000 people on commercial DMPs in the UK.

With a DMP a borrower should ultimately repay the debts in full, and this makes it different to an IVA, which is a form of insolvency where a percentage of the debt is written off. It is possible for borrowers to arrange DMPs themselves, but they will generally approach a debt management company that will usually charge a fee to arrange a plan with creditors.

The debt management company works out a realistic monthly payment with the borrower by considering their income, financial commitments and household expenses. The company will then attempt to agree a reduced monthly payment with each of the creditors.

Each month, a borrower will make the agreed payments to the debt management company, which in turn shares the money out between the creditors. It’s worth noting that DMP providers don’t always register on your client’s credit file so it’s not something that you can readily recognise. Clients can also struggle to know the difference between an informal arrangement to pay, which is usually made by the client with one creditor at a time, and a DMP, where a specialist company negotiates reduced payments with a number of the client’s creditors on their behalf. Even where a DMP has not been registered on a credit file, it is possible to recognise patterns that would suggest there is one in place. For example, if a number of your client’s credit agreements move into default or show there is an arrangement in place, all at the same time, this could indicate that a debt management company has stepped in to work with the creditors.

A more straightforward approach, however, would be to examine the client’s bank statements as part of your fact find. Look for any regular payments made by direct debit or standing order to a recognised DMP provider. These payments could be made weekly or monthly and would usually be for a relatively small sum in relation to the client’s outstanding debt.

Payment pattern

If you spot a pattern of regular payments to an organisation that you do not recognise, a quick internet search should quickly identify whether it is a DMP provider.

If you do find out that your client is in a DMP, the next step is to establish how long the plan has been in place and whether your client has successfully maintained their regular payments. 

There are lenders, like Pepper Money, that will take the view a borrower who has successfully maintained payments on a plan for a year or more has demonstrated a determination to rehabilitate their finances, and there are competitive options available for borrowers in these circumstances.

Household debt is growing and it seems that more borrowers are becoming burdened by their debt and choosing to take a DMP to help manage their position. This is often a sensible move, and it doesn’t have to mean closing doors on the opportunity to get a new mortgage, as there are competitive products available for borrowers in active DMPs.

It can be hard to identify whether your client is in a DMP, but by taking the time to look through their bank statement, you can learn to recognise when a plan is in place and this  will help you to choose the most appropriate mortgage for their needs.