Neither a borrower nor a lender be used to be the standard to live by, but times have certainly changed. Consumer debt in the UK including mortgages passed the one-trillion-pound mark last year, and despite indications that consumers are starting to pay back more than they are borrowing, the era of saving up to buy consumer goods appears to be a thing of the past.
So its unsurprising that credit problems are on the rise. From the odd late or missed payment to serial debt consolidators, increasing numbers of consumers are finding themselves with heavier levels of debt. Estimates suggest roughly 9.1 million people are excluded from mainstream borrowing as a result of mismanaged debt.
But not all these borrowers are desperate, contrary to hysterical media coverage. Reports show that plenty of consumers are happily meeting monthly repayments, but continue to shop around for mortgages, loans and credit cards with lower interest rates.
And not all these debts are substantial. Plenty of people have notched up black marks on their credit scores by paying the minimum each month on their credit cards, just a day too late. Its easily done.
As borrowers juggle more and more debt, the chance of a late or missed payment increases, although mortgage and rental repayments always tend to be paid first, says Helen Saxon, spokesperson with the Consumer Credit Counselling Services.
See if you can reduce your monthly outgoings by consolidating your existing credit
Debt not me
There are plenty of misconceptions about the kinds of people who end up with a rejection from some high street lenders because of their credit history.
Broadly speaking, these borrowers tend to be older nearly 75 per cent are aged between 35 and 54, in contrast with 51 per cent of average mortgage borrowers. According to a survey produced by sub-prime specialist lender GMAC-RFC last year, divorce, job loss and ill health are the main reasons people end up with a poor credit score. Significantly, 18 per cent of non-conforming borrowers are divorced, separated or widowed compared to just 7 per cent of mainstream borrowers.
Also, if people do suffer from habitual credit problems, it may be several years before the problem is picked up by credit-scoring companies like Experian or Equifax.
In defiance of the stereotype, a higher proportion of non- conforming mortgage borrowers than average also tend to be in lower management or skilled jobs and earn more than the national average of £25,000 a year.
Mortgage options?
So if you already have credit problems, how can it make sense to apply for an even bigger debt in the shape of debt consolidation through a mortgage?
Well often, taking on another mortgage gives borrowers the chance to prove that they can keep up regular repayments and so repair their credit file in the eyes of mortgage and other credit lenders.
The fact is that despite past credit crunches, 47 per cent of those classed as non-conforming borrowers save regularly and 12 per cent describe themselves as comfortably off, according to the GMAC report. As such, you can understand why mortgage lenders see these borrowers as only a little riskier than the average borrower.
Keith Street, director of sales at sub-prime specialist lender Kensington Mortgages, says the only people who should never be lent money are those who cant afford the repayments.
People who have had the misfortune to have a change in circumstances and fall behind with any repayments shouldnt be treated differently from borrowers with unblemished credit records. Prime borrowers may also be maxed out on their credit cards, says Street.
Cathy Hearnden, a director with mortgage broker MyMortgageDirect, on the other hand, agrees but says it is sometimes worth staying with the mortgage lender you have instead of remortgaging to consolidate.
There is a point where you shouldnt take on more debt, although it doesnt happen that often, she says. If you are at the point where no remortgage is going to pay all your debts off, the best thing to do is to contact all your creditors to arrange repayment plans, including your mortgage lender, who may agree to readjust your monthly mortgage payments for a while.
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Take my advice
If you find yourself getting into mortgage repayment difficulties, the first thing you should always do is approach your lender to discuss it. The lender may offer you a short payment holiday or the option to downsize your monthly repayments, for example, although you will have to make up the missed payments at a later date.
But whatever you decide to do, talk to a mortgage adviser who will save you money on failed applications. Also, the vast majority of non-conforming loans are only offered through intermediaries, although you should still watch your back, says Hearnden. Talk to a couple of brokers before you settle on one and always be aware that a few unscrupulous brokers are still floating about this area of the market because these loans attract higher commission fees.
Another danger for borrowers is that many lenders have cascade underwriting systems, which automatically send rejected applications on to loans with more relaxed but less competitive criteria. On the plus side, borrowers are more likely to be approved for a loan, but if the broker fails to check this loan against the rest of the market the loan may well be extremely uncompetitive, especially as interest rates are substantially higher in this area of the market.
Ray Boulger, spokesman with broker John Charcol, warns that the cost of bad advice for borrowers with credit problems can be substantial: Avoid mortgage brokers who work with a small panel of lenders because the choice of products can be poor.
He adds: Also avoid brokers advertising debt consolidation and sub-prime mortgages on the back pages of the red-top tabloids who are often charging fees worth between 3 and 10 per cent of the loan. This can cost borrowers thousands of pounds over the odds.
Sub-prime (non-conforming) mortgages versus conventional loans: key differences
Sub-prime loans tend to have shorter terms
Interest rates are marginally to substantially higher than on standard loans
Shorter terms 1/2/3 years, none over five or ten years
Fees no substantial difference: all mortgage lenders are charging higher fees now
Higher deposits are expected from borrowers, 10 per cent at least
Less flexibility, no overpayments or underpayments allowed. No current account loans
Generally higher early-redemption penalties
CCJs and IVAs
County court judgment (CCJ) A CCJ is a note on your credit file that a creditor has had a late or missed repayment. First check that the amount stated is correct. Then, if you can afford to, pay the amount in full within the month and the CCJ effectively vanishes, keeping your credit file clean. If you fail to do this, the CCJ is registered for six years and credit reference agencies can access this information, making it difficult or more expensive to get credit in the future. If you pay the debt later, get a certificate of satisfaction to show future creditors.
Individual voluntary arrangement (IVA) An IVA is more serious and usually involves larger sums than a CCJ and is an alternative to bankruptcy. This is an arrangement between the borrower and the creditor to repay a percentage of the debt over a set period, usually five years. At the end of the term, any outstanding debt is usually written off.
