A combination of the fallout from the Covid pandemic plus the ensuing rampant inflation, rising interest rates and cost-of-living crisis has seriously impacted people’s day-to-day finances, with more individuals struggling to meet regular bills.
These pressures are now evident across the mortgage industry, with brokers and lenders dealing with more borrowers with credit issues.
A recent report from Pepper Money has found there are more than 15 million people who have missed payments on credit cards, mortgages or other bills — the highest number recorded in the five years it has been collating this data.
We’ve taken a more flexible view on certain one-off credit issues, like CCJs resulting from parking fines
A deeper dive into this data shows that 8.4 million people have missed payments in the past three years — a 21% increase on the previous year’s figure.
This indicates the problems that higher interest rates and higher mortgage rates are causing for consumers. For many, this is their largest expense, and the significant rate jump for those coming off a low-cost fixed rate is inevitably creating difficulties.
Given this background, it is no surprise to hear Twenty7Tec’s observation that, over the past year, its ‘Top 10’ broker searches have regularly included those associated with either arrears, missed payments, defaults or county court judgments (CCJs).
However, such broker searches are set to produce a growing range of options as the lender market adapts to meet the needs of these borrowers.
Sophisticated approach
More lenders are moving into this sector, offering a sophisticated approach to product design and pricing, with banded options aimed at different segments of the impaired-credit market.
Inclusive criteria are key. Don’t rely on rate-driven sourcing — and use your BDMs
Brokers point out that even high-street lenders — which traditionally have not catered to those with credit problems — have been taking a more pragmatic approach to support borrowers.
Kerr & Watson director Stephen Kerr says: “Some lenders have changed their criteria and algorithm when credit scoring — to be more lenient with people who have had some credit blips over the past couple of years.”
L&C Mortgages associate director of communications David Hollingworth agrees.
“Lenders have played an important role in helping borrowers get through a difficult few years,” he says.
However, Hollingworth adds that, for the foreseeable future, a greater number of mortgage borrowers will not meet standard criteria and will have to explore more specialist lending options, relying on brokers and intermediaries to source the most appropriate deal. This will be dependent on how recently their problems occurred, the number of missed payments and the size of those defaults.
Around one in five people has experienced adverse credit in the past three years
“If it is a minor blip, it’s likely people can remortgage with a high-street lender,” says Private Finance technical director Chris Sykes.
“But, if it’s missed mortgage payments, defaults, multiple missed payments or CCJs, they should look at the range of products now available from specialist lenders.”
He says there are a number of lenders specifically looking at this area, including Aldermore, Bluestone, Foundation Home Loans, Pepper Money and West One.
Mutual support
Sykes adds that building societies have also become increasingly active in this space, picking up what he calls the “middle ground” between high-street banks and more specialist providers.
Mutuals such as Buckinghamshire Building Society, Chorley BS, Hinckley & Rugby BS and Melton BS all offer credit-repair products, says Sykes, which take a more individual approach to underwriting. This enables brokers to contextualise borrowers’ previous credit problems.
Expertise, current knowledge and a genuine desire to help are essential for brokers to secure the best deal
As a result, many mutuals will lend, particularly where issues have arisen from incidents such as divorce or redundancy.
Buckinghamshire BS head of mortgage sales Claire Askham says the mutual has reviewed the way it considers non-standard and impaired-credit cases to ensure it continues to support members who may have experienced financial difficulties.
“We’ve taken a more flexible view on certain one-off credit issues, like CCJs resulting from parking fines,” says Askham.
She adds that the society has also lowered the number of years for which it asks about missed payments, depending on the offence, and now supports applicants with debt management plans (DMPs) where appropriate.
Given the complexities in this market, most specialist lenders adopt a tiered approach. They offer an array of products at different price points, depending on the severity of the credit problem, how recently it occurred and whether it includes a CCJ or DMP.
We’ve strengthened the options for our advisers to help them keep on top of the array of rates and criteria
SPF Private Clients chief executive Mark Harris elaborates: “Pepper Money, for example, has a suite of products ranging from those who haven’t had a CCJ or default in the past six months (Pepper 6) to those who haven’t had a CCJ or default in the past 48 months (Pepper 48).”
Premium pricing
Harris says the impaired-credit market has become more attractive to lenders — due not only to the growing number of consumers with credit problems but also to its potentially higher margins. However, these require lenders to underwrite the risks accurately.
“There are higher risks associated with this type of lending, so there is a premium on pricing,” says Harris.
“For example, in mid-November a borrower with a clean credit history could get a five-year fix at just over 4%. In contrast, if they have a recent credit blip, a specialist lender would be offering them a five-year fix in the high sixes, or just under or just over 7%.”
Hollingworth points out that those with bigger credit problems may be paying more than 8% on comparable mortgages.
Prices, of course, vary with market conditions. As Harris points out, this mortgage sector is no different from any other.
Building societies have become increasingly active in this space, picking up the middle ground between high-street banks and more specialist providers
“Rates, products and criteria are exposed to factors such as competition, appetite and cost of funds,” he says.
Increased competition in this market, for example, is helping to keep a lid on margins.
Pepper Money sales director Paul Adams says: “It’s a competitive market and rates aren’t far off those on the high street, particularly for customers who narrowly miss out on a high-street mortgage.”
Despite this competition, however, the cost of borrowing in the adverse-credit market, whether in the near-prime space or for those with more severe problems, has not fallen following November’s base-rate cut (at the time of writing).
Like most of the mortgage market, pricing depends more on swap rates than on the base rate.
There are higher risks associated with this type of lending, so there is a premium on pricing
Adams says: “A decrease in the base rate may not shift swap rates downwards if the market believes the rate drop is temporary or if inflationary pressures are expected to persist. This is why we’ve seen a number of lenders increase rates in recent weeks despite the base-rate cut at the start of November.”
Simply Lending chief operations officer David White believes this sector remains a “key market for brokers”, who play a vital role in navigating complex criteria to help borrowers.
“Expertise, current knowledge and a genuine desire to help are essential for brokers to secure the best deal,” he says.
One of the challenges is keeping track of product launches and rate changes as lenders reprice and update their criteria in response to changing market conditions.
Hollingworth says: “We’ve strengthened the options for our advisers to help them keep on top of the array of rates and criteria.
If it is a minor blip, it’s likely people can remortgage with a high-street lender
“Advisers can access the specialist knowledge of the Brilliant Solutions team to ensure they have considered the full range of product options. This will continue to educate and improve our advisers’ knowledge in this area to ensure the best outcomes for customers, without charging a fee.”
Help for brokers
Adams says specialist lenders such as Pepper Money want to work with brokers to help them place business.
“Around one in five people has experienced adverse credit in the past three years, so all brokers will have some customers whose credit profile may mean their application is rejected by a high-street lender.
“Inclusive criteria are key for these customers. Don’t rely solely on rate-driven sourcing. There are several criteria-sourcing platforms that are really helpful. And make use of your BDMs. They’ll be able to talk you through cases that fall just outside high-street criteria.”
Some lenders have changed their criteria and algorithm when credit scoring — to be more lenient
Brokers expect this market to continue to expand to meet ongoing demand. Inflation may have fallen back to the Bank of England’s target but many household budgets remain under pressure, particularly due to higher mortgage rates.
Hollingworth concludes: “Hopefully, as more lenders grow their proposition, the market will continue to provide much-needed solutions for borrowers who have faced difficulties.”
This article featured in the December 2024/January 2025 edition of Mortgage Strategy.
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