Cures for problem borrowers

Time was when anyone self-employed or with debt problems worried about getting a mortgage. Not any more – the picture is changing fast as specialist lenders compete for non-standard borrowers.

Lenders are realising a need for flexibility and increasingly offer specialist products to suit these borrowers.

“Many lenders now deal with sub prime or adverse credit, buy-to-let and self-certification mortgages, and can help borrowers find a mortgage,” says Paul Fincham, spokesman for HBOS which offers non-standard mortgages through its Birmingham Midshires arm.

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Borrowers in debt

Over 9 million people were denied credit in 2005, numbers are set to rise to 9.4m by 2010, say market analysts Datamonitor. There are many reasons customers fall outside lenders’ ordinary criteria including mortgage arrears, county court judgements (CCJs) or even bankruptcy. Others simply have not built up a credit record. Mortgages have been available for some time to cater for this ‘sub-prime’ market, but rates have often been higher than available on standard mortgages. But this is no longer the case, says Clare Mortimer, Birmingham Midshires spokesperson.

“Sub prime has progressed enormously over recent years, and rates will be closer to mainstream than ever.

“At Birmingham Midshires, we have six categories ranging from heavy adverse to near prime. Near prime will be very close to mainstream rates, indicating that this was a bump and a scrape rather than a major issue.”

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BM Solutions now offers a tracker deal at 6.6 per cent with a 90 per cent loan to value for near prime borrowers, who may have CCJs of just £500 and none in the last six months, or bankruptcy which has been discharged for one year.

For heavy adverse credit customers, whose credit history can include CCJs of up to £10,000 and none in the last three months, or who are discharged bankrupts, the BM Solutions tracker rate rises to 6.65 per cent with an 80 per cent LTV.

The range of options for borrowers is now huge, says John Mawdesley, director of the Mortgage Partnership: “We now have 30,000 different products out there and over 100 lenders, so almost everyone will find something available.” The sheer choice means, he says, that potential borrowers could wear out a lot of shoe leather unless they find a good broker.

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And as lenders become more adept at assessing applications, the extra cost is now far less, Mawdesley argues. Some lenders now treat former bankrupts who would once have been judged a high risk as only medium risk, he says, “and if you shop around, you could be paying less than many lenders’ standard variable rates.” While the highest risk borrowers could find themselves paying a premium of 2.5 to three per cent over base rate, that could still total less than eight per cent, Mawdesley says.

Fewer lenders now have overhanging early repayment charges, Mawdesley points out, so borrowers could switch to a standard mortgage after three years. “But you need to watch out for reversion charges which can be high,” he warns. At Mortgages plc, for instance, some near prime deals revert to 9.15 per cent once the discounted or fixed deal ends, with completion fees of at least £1,500.

And Julian Wells, head of marketing at Mortgages plc, points out that the lender has just reduced its fixed and discounted rates by up to 0.6 per cent and removed overhang charges too: “If customers don’t like the reversion rate they move away. They’re savvy, and so are their brokers. Consumers are the real winners in the battle which is raging between lenders for market share.” That means, says Mawdesley, “after three years you could then have a clear credit history, as long as you meet your mortgage repayments regularly.”
Mortgages for the self-employed

Homeowners are increasingly choosing self-certification, as lenders offer great deals based on varying income sources. “More and more people are finding themselves in unusual work situations which can make it difficult to prove their income,” says a spokesperson at Mortgage Express, who points out that the lender offers true self-certification mortgages which require no proof of income.

“This includes people who have a second job, work overtime, receive bonuses, or work on a commission basis. Due to this trend, Mortgage Express lends to both PAYE and self-employed customers to cater for those people who are PAYE but have difficulty proving their additional income.”

Self-employed people once had difficulty finding mortgage products to suit them without three years’ audited accounts, but lenders are beginning to relax the rules on borrowing.

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Confidence is riding high among the self-employed, according to Kensington Mortgages, which has now launched a self-certification range for self-employed borrowers with not restrictions on how long they have been trading, and with a maximum 90 per cent LTV and no income verification required.

But borrowers need to take care not to over-estimate their income to secure a large mortgage, experts warn. “Affordability is the key,” says Kate Raybould, broker manager at Cheshire Mortgage Brokers, the brokerage arm of Cheshire Building Society. “In a climate of increasing interest rates, people need to be honest about their earnings to avoid repossessions.” Brokers carry out budget planning, and warn that making false claims is a criminal offence.

Yet as lenders focus on affordability, it is easier than ever for self-employed people to find a good deal with a mainstream lender, she adds. Moneyfacts self-certification best buys now include Standard Life Bank at 5.25 per cent and a 75 per cent maximum LTV, Giraffe at 5.59 and 85 per cent LTV, and a fixed Cheshire BS deal at 5.49 per cent with 80 per cent LTV.

As lenders become more adept at assessing risk and offer ever more competitive products, there is more flexibility than ever for non-standard borrowers.

“Our considerable experience of lending to borrowers with adverse credit has taught us how to build products for customers whose circumstances mean they are not catered for by other lenders,” says Ian Giles, Kensington’s director of marketing.

“If, for example, someone is recently self-employed, wishes to invest in a buy-to-let property with only a 10 per cent deposit, or wants to borrow 95 per cent without paying a higher lending charge, they would have found it very hard to get the right deal in the past.” Kensington’s rates start at 6.10 per cent, and there is also a three-year fixed rate available at 6.39 per cent. All come with flexible features (overpay, underpay, payment holidays) and no higher lending charges. Demand, says Giles, has exceeded all expectations.

“More of us than ever are non-standard borrowers now, and things have never looked brighter,” says Mawdesley. Anyone with a damaged credit record, starting a new business or with different income sources will now find it easier than ever to find a mortgage product just right for them.