There is an emerging niche sector in the mortgage market you may not have heard of, called complex prime.
However, the likelihood is that it is only the name that has passed you by because, depending on who you talk to, its definition largely reflects the kind of business you will have been doing for some time. And if you have not done business in this market, get ready, because you will.
A complex-prime borrower is one who does not meet the standard underwriting criteria for mainstream mortgage lenders. Not because there is anything untoward in their credit history or practical ability to meet the loan repayments, but because they have unusual requirements.
Sun Bank estimates the size of the complex-prime market to be in the region of £32bn a year and that one in five people fall into this category. Compare this to £109bn lent to the prime market and £5bn to the sub-prime market. Based on these figures we are not looking at such a rare incidence as sub prime, of which so much is talked about.
In fact whereas there is a view the sub-prime market may have a natural life span that will peter out as credit rating and underwriting procedures develop, for the same reason, the complex-prime market is set to grow.
Not negating the very specialist needs of clients within this market, the most complex thing about complex prime is its definition. The defining lines become blurred when we start to look at what different lenders consider complex prime.
It could mean a client has income from various sources, or it could mean the client is lacking a history of mortgage payments in this country or someone who moves home a lot. It could also mean the property the mortgage loan is needed for, is unusual in some way.
Jeff Knight, IFA marketing manager at Sun Bank, says: ‘There are endless categories of complex-prime borrowers in unusual circumstances, or where their income comes from different sources. For example they may have rental income, pensions or trust funds. Their income may be £100,000, but their salary only £50,000 and most lenders will only take the £50,000 into consideration.’
He adds: ‘Expatriates or foreign clients may struggle to get a loan, as will those who have moved around with their job because the high street lenders do not like it if you keep changing address ‘ it makes them nervous. Then there are those who retire early with pension income.’
Of those falling into the complex-prime category, 53.3% are due to their non-standard income status, 19.3% because they own more than one property, 14.2% because they have insufficient income information and 7.3% because they have non-standard income issues, according to Sun Bank.
The irony is most clients that would fall into this definition are wealthy and therefore far from being a risk as far as meeting their financial liabilities is concerned. The frustration for this type of borrower is they do not fit into the neat and therefore restrictive requirements of the high street lender.
It is not so much that the product to suit their requirements needs to be searched for, but in finding a lender with the flexibility to underwrite the loan.
What we are looking at, therefore, is not a market that needs a specific product, but a more flexible attitude to underwriting. This need is being met by the specialist lenders, rather than the high street providers who do not have the resources or the inclination to underwrite such cases.
Knight says: ‘We take an individual approach to underwriting. The high street lenders are geared for high volumes ‘ the sausage machine approach. We take more time and assess each situation individually to see the case through.’
The Mortgage Businesses proposition for this market is its Prestige product, says Matthew Russell, sales support manager for the lender.
‘In this market you are looking at higher loans and a less than straightforward situation. Complex prime reflects the attitude to lending and how you perceive the deal as it comes in. We have a service-orientated approach with individual underwriting from discussion of the need in the first place through the underwriting and completion process to draw down. Our senior underwriters have the experience to adapt a flexible approach in the way they look at the income stream and the type of security.’
It is this flexibility of specialist lenders that means they can apply different products to individual client needs and why you may not see a product called complex prime, but find the needs of the complex-prime borrower are met by a variety of products.
As Andrew Moss, product manager at Mortgage Express, explains: ‘We do not have a specific complex-prime product. It is more an underwriting approach to take to those types of borrower. We have a non-status product where you do not have to declare income, which suits those with complex income streams. It works very simply in that we limit lending to 75% LTV and the applicant must be able to provide proof of address and credit rating. But with regards to income, we do not ask for evidence.
Moss accepts that for the higher risk of accepting a case with no income evidence, the need for some comfort on the lender’s part is reflected in the loan to value and the slightly higher interest rate of 2% above the bank base rate in this case. But if someone could self certify their income the loan to value (LTV) would rise to 90%.
But in practice the lines are blurred in that the products on the market which meet the needs of complex prime borrowers are the ones considered not full status, the self-certified, multiple income, buy-to-let mortgages.
Stuart Glendining, director at Mortgage 2000, highlights a selection of products which would suit the complex-prime borrower.
‘This is a diverse sector of the market because definitions can vary between organisations,’ he says. ‘Our experience is that First National is most accommodating when it comes to clients with unusual properties such as semi-commercial. It is currently offering a 5.24% base tracker for term with a £295 arrangement fee with no tie-in. First National is also flexible for different types of construction.
‘Other lenders good for clients with unusual properties are the Mortgage Business and i-group. For the self-employed the Mortgage Business will consider clients with only one year’s accounts and for those clients able to supply two-year accounts.Verso offers a self-certification mortgage discounted to 3.48% until April 2003 on a base rate of 5.98%, with an arrangement fee of £325 and £70 up-front fee, with a tie-in till April 2004.’
It is accepted that if your client is a sub-prime borrower they must pay a little more to get themselves into the market. They can, of course, prove they are a good borrower and work their way up to become a full-status borrower. This is not something a complex-prime individual can do, however lenders argue that the loading on complex prime is not restrictive.
‘We are not looking at a contentious type of borrowing so we do not load rates,’ says Russell. ‘We offer a tracker rate of 4.99% and a standard variable rate of 5.84% so rates are pretty keen.’
Knight agrees: ‘Our standard rates are available to complex-prime borrowers. If the case is complicated we may charge slightly higher fees, but we make that clear from the beginning. Sometimes the mortgage rate may have to be loaded, but not anything like to the extent of the sub-prime lenders. 80% of the time complex`-prime borrowers go onto our standard rate.’
If the higher interest rate is a concern for the borrower, their target could be to achieve full status by a mix of saving or overpaying to reach the stage where their borrowing liabilities are met by one source of income. How practical this is obviously depends on their income stream.
Finding lower rates
‘If you have that sort of complex-prime lifestyle you are less likely to change,’ says Moss. ‘You cannot clear your record in the same way as a sub-prime borrower. Once complex prime ‘ always complex prime. But it is possible to find relatively attractive fixed and discounted rates. You are not destined to borrowing at a higher rate.’
This is the target for lenders, to allow complex-prime borrowers, who can present their history, to follow a no-claims bonus scheme and arrive at lower interest rates.
‘We have not created an obstacle as working practices change and general span of employment changes. We are all looking to make sure we have processes in place to meet borrower’s requirements. One way forward is instead of defining borrowers as sub prime is to recognise complex prime.’
As individuals’ circumstances change and it becomes more common for people to have income from various sources, or have occupations where earnings may fluctuate, the complex-prime mortgage will become more commonplace.
Too many people are being squeezed into a one-size-fits-all loan. We may see a time when the sub-prime and complex-prime markets are more the mainstream than the prime borrowers. But no-one has told the high street lenders yet.
But need the mortgage broker worry? The longer mainstream lenders plod along their narrow underwriting lines, the better for the broker and the specialist lender already ahead of the game. Lenders in this market have a special relationship with brokers.
‘We look to complement what a broker is doing with their client,’ says Russell. ‘The client is important to the broker and we do not want to step on any toes. It is important the client has a good feeling about their adviser and so we work very closely with that introductory broker.’
Stephanie Spicer is a freelance journalist
Complex prime describes borrowers who do meet the rigid requirements of high street lenders, but do not fall into the sub-prime category.
The complex-prime market is thought to be larger than the sub-prime market, however far less is written or spoken about it.
By underwriting cases individually, specialist lenders are able to pick up complex cases rejected by high street lenders.