Move over sub-prime, make way for adverse credit

Now, every trade publication worth its salt has an entire section dedicated to the sector. But just because the name specialist finance is new, the notion is not. Every adviser is well aware that clients do not come off the shelf. Every person is an individual with their own specific set of circumstances, assets, liabilities, prospects and objectives.

Yet in finance, lenders at least still have a tendency to treat every client in the same way – as though they ought to fit into pigeon hole a, b or c without deviating. 

Brokers know this is rarely the case, and in many ways the clients who can squeeze themselves into lenders’ boxes do not need our help. Perhaps given that context, it is counter-intuitive to think that these are the clients most advisers deal with day in, day out.

It is really those who do not fit the mold, those whose circumstances are by definition individual, who desperately need a qualified mortgage adviser to assist them. It is encouraging, therefore, that networks and brokers alike are waking up to the advantage of helping these borrowers rather than labelling them a ‘problem’ that will take too much work for too little return. 

There are several factors influencing this. Sub-prime as a category of borrower never went away – there are many hundreds of thousands of borrowers in the UK whose credit suffers a temporary blip due to death in the family, divorce, redundancy, serious illness or many other reasons. The need for mortgage finance remains. Today we refer to borrowers in this category as having ‘adverse credit’ and, to be fair, there are significant differences between this and the sub-prime of old. 

The first is the regulation governing all first charge mortgage lending. Sub-prime was historically sold in tandem with self-certification mortgages, and financially vulnerable borrowers were often wooed by cheap discounted rates without having to prove their income or affordability.

This is now very definitely not the case. Perfect credit, adverse credit, no history of credit at all, lenders must now be satisfied that a borrower can afford the mortgage before it is awarded, meaning those with no job, no income and no prospects are simply not going to qualify. This shift has definitely meant that lending in this specialist category may be seen as higher risk, but it is not deemed reckless as sub-prime was in the past.

The second reason for increasing interest in adverse credit lending is that interest rates have been so low for so long that lenders are struggling to make money on mortgages at vanilla rates. Specialist loans for those with a history of adverse credit carry more risk and therefore attract higher rates of interest. In other words, lending in this market is a lot more profitable.

The third is also linked to interest rates. Investors are in search of reasonable returns and specialist lending offers good return on investment. Ultimately the performance of mortgage asset relies on two things: the quality of the security and the ability of the borrower to repay.

House prices continue to rise in most areas of the UK, loan-to-values rarely exceed 85 per cent and borrowers deemed adverse have demonstrated their ability to repay the loan. There is money available to lend and there are borrowers who need to borrow. 

Lenders have cottoned on and that is reflected by the number of players in the space. Kensington has long subscribed to the value of manually underwriting borrowers and taking a common sense approach to their circumstances. Many of the smaller building societies, too, never gave up finding more flexible approaches to underwriting mortgages and helping borrowers who had experienced minor financial difficulties find a mortgage.

Now, however, they are joined by the likes of Pepper Home Loans, which launched last year, Magellan Home Loans, Precise Mortgages and the most recent addition to the gang, The Mortgage Lender, headed by Trevor Pothecary who was the brains behind Mortgages Plc. 

These lenders tend to view applications on a case-by-case basis and will take time to get under the skin of a deal. They want to assess whether the borrower has resolved a historical credit issue, for example an inheritance tax bill taking them temporarily over their overdraft limit, or the loss of a job when they have now returned to full-time employment. Where the borrower can demonstrate regular income and has made efforts to repair their credit, lenders are likely to view the application positively.

Although there is a price to pay, rates are still historically very low. The Mortgage Lender, for example, offers a two-year tracker rate at 1.98 per cent plus Libor, reverting to 4.88 per cent standard variable rate up to 75 per cent LTV. Its 80 per cent LTV deal is priced at 2.2 per cent plus Libor for two years. Pepper prices slightly higher with its two-year tracker rate at 2.93 per cent plus Libor up to 70 per cent LTV, reverting to a lower SVR of 3.63 per cent. Precise offers a two-year tracker up to 75 per cent LTV at 2.94 per cent plus Libor. And Magellan, perhaps the most entrenched adverse credit lender in the market at the moment, offers a 3.21 per cent plus Libor term tracker over 25 years up to 70 per cent.

Fixed rates are also available. Pepper’s two-year fixed rate up to 75 per cent LTV is currently priced at 3.28 per cent, Precise offers a three-year fixed rate at 3.29 per cent up to 75 per cent LTV and The Mortgage Lender’s two-year fixed rate up to 85 per cent LTV comes in at 3.4 per cent. 

These rates are not especially expensive and it is partly that driving more borrowers to remortgage off SVR when perhaps they have felt lenders’ tightening criteria since the financial crisis would have prohibited them getting a better rate. Advisers have a responsibility to revisit clients who have not remortgaged in several years – with the base rate now at 0.25 per cent and set to go even lower, there is no excuse not to go back to clients to review the rate they are on and consider whether they could save money by remortgaging. 

Just three years ago they might have struggled; now, brokers have access to a range of lenders competing to get this business in. Even where advisers are unsure of the options available, increasingly networks will have a panel of specialists who can work with brokers and their clients or on a referral basis. Either way, there is opportunity to help clients who have suffered cashflow issues in the past rebuild their financial futures and earn a healthy income yourself in the process.

Lucy Hodge is managing director of Vantage Finance 

Key points

It is borrowers who do not fit the mold who desperately need a qualified mortgage adviser to assist them.

Sub-prime as a category of borrower never went away.

Brokers have access to a range of lenders competing to get this business.