Mortgage brokers are receiving more applications from customers who have experienced credit problems, as the cost-of-living crisis, much higher interest rates and the financial disruption during Covid start to take their toll.
“We’ve already seen an increase in the number of borrowers with missed payments and credit defaults,” says Your Mortgage Decisions director Dominik Lipnicki, who warns this problem is likely to get much worse.
Mortgages for Business head of residential mortgages Neil Bishop agrees.
We encourage clients to come to us six months in advance to give time to consider options
“This will become a bigger problem down the line, especially with clients coming off five-year deals,” he says. “Within this period we have had the pandemic and the cost-of-living crisis and I don’t feel we’ve seen the true fallout of that yet in the personal mortgage market.”
Specialist Finance Centre owner and managing director Daniel Yeo thinks the number of households on fixed-rate mortgages is masking, potentially, a “ticking timebomb” of credit problems.
“Brokers and lenders are likely to be inundated with clients who’ve missed payments on unsecured credit and mortgage arrangements. This will cause issues because lender policy and criteria are typically not forgiving in these areas.”
There is clear evidence that the cost-of-living crisis is causing people to fall behind with debt repayments. According to the Financial Conduct Authority, 11 million adults were struggling to pay their bills in January this year — a 3.1 million increase on the previous May.
This year, 1.4 million borrowers will face a significant increase in their monthly payment as their fixed-rate mortgage comes to an end
In April, meanwhile, consumer champion Which? estimated that 7.3% of households had missed at least one repayment on a mortgage, rent, loan, credit card or utility bill — a significantly higher proportion than the 5.2% experiencing similar credit problems in April 2020, at the start of the pandemic.
These missed payments can make remortgaging more difficult. Specialist lender Together found that 53% of adults with a ‘credit blip’ said it had affected their ability to get a mortgage. The problem was particularly acute for younger borrowers, who might have a less comprehensive credit history. Together found that 86% of under-35s with missed payments had found it harder to secure a mortgage.
Are lenders tightening their criteria in response to these increased credit problems? Bishop says he has not seen evidence of this yet, but adds that the situation is likely to change if credit problems become more widespread.
Some borrowers will be left with no other option than to move to their lender’s SVR, which could be as high as 10%
“With the enhanced stress testing lenders are carrying out, it would make sense that their internal credit scores are less relaxed on missed payments than they were before.
“Many high-street lenders are vague regarding their acceptance of minor credit problems, such as a few missed payments. They often rely on decision-in-principle systems and say to see what this comes back with, rather than give a definitive answer.”
Cautious approach
However, Lipnicki is starting to see a more cautious approach from mainstream lenders.
“They have become less flexible when it comes to blips, even minor ones,” he says.
We’re seeing an increase in applications where the client is looking at a product transfer up to six months in advance
With more people experiencing credit problems, and mainstream lenders less willing to take on these cases, more borrowers will turn to specialist lenders. Fortunately, there appears to be adequate capacity to soak up demand.
The Mortgage Expert spokesperson Darryl Dhoffer, who specialises in advice for clients with an impaired credit history, says: “There is considerable appetite to lend to these clients, from both specialist lenders and some building societies.”
L&C Mortgages associate director David Hollingworth says: “Thankfully, there is still a choice of lenders catering to this market. Shawbrook recently acquired Bluestone — a clear indication of its expectation for this to be an important sector.
“There are plenty of names, including Precise, Pepper Money and Vida, that will offer a range of options.”
We have had the pandemic and the cost-of-living crisis and I don’t feel we’ve seen the true fallout of that yet in the personal mortgage market
Hollingworth adds that some lenders, such as Metro Bank, have started to operate in the ‘near prime’ space, providing options to those who have experienced more limited problems.
Adverse credit
Private Finance technical director Chris Sykes says lenders focus on four distinct, adverse-credit areas: ‘light credit’, where there is a more limited credit history; ‘light’ adverse credit; ‘moderate’ adverse credit; and ‘heavy’ adverse credit, which includes county court judgments, debt management plans, individual voluntary arrangements or previous bankruptcy.
Although lenders pulled in their horns in the wake of last year’s Mini-Budget — particularly in the heavy adverse-credit market — they have since returned, he says.
“They are eager for business, from what I am seeing.”
KAG Financial director Kylie-Ann Gatecliffe agrees, saying: “There was a shortage of some of these products as lenders withdrew deals last year. But we are back to normal levels now.”
If lenders are stress testing a few per cent above the SVR, the affordability will definitely take a hit
Rates on specialist mortgage products are typically higher than on vanilla products, with the exact premium depending on the severity of the credit blip and how recently problems occurred. But Gatecliffe points out these rate increases have been lower than those on mainstream mortgages.
This doesn’t disguise the fact rates can be high, however, particularly in the heavy adverse-credit sector.
“Rates vary from around 5.5% in the near-prime market to an eye-watering 15.89%,” says Dhoffer, speaking before the latest increase in the base rate, to 5%.
Although there is capacity to lend, these higher rates present an affordability challenge for many. Bishop points out these deals tend to have higher
standard variable rates (SVRs) after any fixed rate expires.
“If lenders are stress testing a few per cent above the SVR, the affordability will definitely take a hit.”
Borrowers are having to extend their term or switch to interest-only to meet this challenge, Lipnicki says. As a result, brokers are encouraging clients to talk to them at the earliest opportunity to address problems that might arise as a result of a poor credit history — whether it’s borrowers experiencing problems for the first time or those whose previous credit problems have worsened.
Many high-street lenders are vague regarding their acceptance of minor credit problems
“We encourage clients to come to us six months in advance so we have time to consider options and also help them budget properly, erasing any spending that is not needed,” says Gatecliffe.
Yeo adds: “We’re seeing an increase in applications where the client is looking at a product transfer up to six months in advance, but also taking out a second charge loan to clear unsecured debt, in preparation for their first charge payment increase.”
Restricted choice
As higher mortgage rates filter through, this is likely to become an ever more urgent issue, with squeezed affordability restricting borrowers’ product choice.
“This year, 1.4 million borrowers will face a significant increase in their monthly payment as their fixed-rate mortgage comes to an end,” says Strive Mortgages director Jamie Elvin.
This will exacerbate affordability issues, he says, which will be pronounced for those with credit blips.
We’ve already seen an increase in the number of borrowers with missed payments and credit defaults
“This will leave some borrowers with no other option than to move to their lender’s SVR, which could be as high as 10%.”
Specialist lenders appear to have the capacity to deal with increased adverse-credit cases at present. But, if numbers rise as expected, there will need to be greater flexibility, from both mainstream and specialist lenders, to ensure the number of ‘mortgage prisoners’ does not rise significantly — leaving borrowers on potentially more expensive SVRs, and creating a vicious circle of rising mortgage arrears and ever-tightening lending restrictions for those with credit problems.
This article featured in the July/August 2023 edition of MS.
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