Is the sub-prime mortgage market back?

Everyone in the financial industry seems to be wary of the term ‘sub-prime’, in reality this relates to those people with poorer credit histories. The 2007-2008 financial crisis had a major impact upon the sub-prime lending market, indeed some claiming that it was practically impossible for a sub-prime candidate to obtain any kind of loan. However, it seems that more and more lenders are now willing to lend, with some even lending to those with bankruptcy issues. It seems therefore that there is still strong consumer demand for this type of lending.

The new retail bank Masthaven recently confirmed that it is willing to lend to people who have suffered financial problems, such as missed mortgage payment and even those with CCJs, depending on the circumstances of them. Pepper Home loans which deals with people who have had “financial difficulties” or “credit blips” went one stage further by announcing that it has “slashed” its rates on some products and services. Thus not only is the market expanding it seems that it is becomingly more competitive, which is only good news for the consumers.

Most of the so called sub-prime lenders are specialist companies that sell through brokers, but that does not mean that they are in some way inaccessible to all. The most common names are Precise Mortgages, Bluestone, Pepper Home loans, Magellan Home loans and Kensington Mortgages.

It also seems that even the term sub prime is having a revamp. A new lexicon has developed to describe and categorise which now includes “impaired credit” and “credit repair”. It also now differentiates between “light impaired”, where someone has a small sum posted on their credit file such as a missed catalogue payment, and “heavy adverse”, which relates to those with serious financial issues, such as bankruptcy. The lighter the impairment the lower the interest rate. So someone in this category could potentially still be offered a two year fixed deal at under 2.5%. Pepper Home loans have recently introduced some mortgages as low as 2.28% for those “who marginally fail a credit score”.

For those emerging from serious financial problems however the situation is different. A consumer in this category may in some cases be offered a mortgage of up to 80% or more. Magellan Home loans offer a 3 year fixed at 8.2% up to 70% loan to value. However, this category is now at least being considered as a viable lending option.

Peter Gettins of brokers London & Country noted, “At the lightest end of the market is Kensington, which has a ‘tiered’ approach. It is just off the high street, so to speak, willing to overlook minor credit issues. You’ll pay around 1%-1.5% higher than the main lenders on the high street; Precise, at its most extreme ‘tier 5’ level, will look at you if you’ve had up to five defaults in the last couple of years.” Gettins continues that Bluestone will consider applicants who have come out of an IVA or bankruptcy at least three years ago, and will overlook up to four missed mortgage payments. He adds: “Magellan is probably at the most severe end. It will offer loans to bankrupts discharged just a year ago. But rates are in the 8% region. That said, they do have strict rules about your financial record over the past 12 months.”

An increasing number of ‘minor’ defaults being posted on credit files are also dictating a lot of new guidelines. Guardian Money highlighted this practice especially by mobile phone companies as trivial. “We are seeing more leniency on defaults which have been registered by phone companies,” says Gettins.

Furthermore, Ray Boulger of John Charcol encourages potential customers to look at smaller building societies as they tend to do ‘manual underwriting’ and assess each individual applicant as opposed to a computer says no approach.
Brokers agree that lending criteria is indeed very different today, but also point out that potential borrowers are still subject to the same affordability tests as more conventional mainstream lenders, and that they will usually have to put down a significant deposit, around 20% minimum. “There is an obligation on brokers and lenders to check that the borrowing is sensible and appropriate,” notes Gettins. “The days of self-certified loans (where borrowers could name their income without it being checked) are long over.”

Thus it seems the ‘sub-prime’ mortgage market is making significant strides to ensure that every individual, even those with the poorest credit history have at least some access to lending. This can be further enforced by activity in the ultra-competitive unsecured loans industry, which also seems to be following suit.