Council tax quandary demonstrates need for more near prime solutions – Castling

One of the largest rises was in council tax. Not only do homeowners have few options when it comes to limiting the damage – it’s not like you can shop around for a new council, attractive as that idea might be – but the size of the incoming hikes was a worry. 

Recent analysis by the PA news agency found that nine in 10 councils in England planned to increase council tax bills by 4.99% this April, the largest hike permitted without needing to hold a local referendum.

These increases are becoming a painful trend, too, with the analysis suggesting that around two-thirds of these councils will have ratcheted up council tax by the maximum amount for the last three years. 

These rising bills have clearly had an impact on the financial health of many households across the UK. Data from the government last year suggested that council tax arrears had hit £6bn, while the debt advice charity Debtline confirmed that it had become the most common priority debt with which people were looking for support. 

Evidently, increasing numbers have found the prospect of keeping up to date with their council tax more challenging. 

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Temporary or longer-lasting payment problem? 

However, it’s important to distinguish between temporary and long-lasting payment issues.

Some homeowners will have long-term financial problems they need to rectify, and the fact they have fallen behind on their council tax could be a symptom of a larger concern.

That won’t be the case for all, though. There will be plenty of homeowners for whom the difficulties in keeping on top of the council tax repayments represented a short-term hiccup. It could be that they lost their job, fell ill or were hit with a large, unexpected payment that took priority. They may have missed a payment or two, but the situation has since been rectified and they are back on top of their finances. 

This latter group should, on the face of it, be a good prospect for raising mortgage finance.

Yet brokers tell us that options can be far more limited for their clients who have black marks on their record, even if they are in a healthier position today. 

What near prime borrowers need 

There are various ways in which near prime borrowers find themselves under-served by mainstream mortgage lenders. 

The level of unsatisfied registered defaults can be a burden if lenders employ unrealistically low caps on the debt. Just as important as a higher cap is ensuring that this only applies to the current level of debt, not the sum owed at the outset. 

After all, borrowers should see the benefit from reducing the size of their debt, even if it is not fully cleared by the time they need to raise a mortgage or refinance. 

Another important factor here is the loan to value (LTV) available on near prime mortgage products. With house prices continuing to rise, building a deposit of more than 10% may not be possible, particularly as they focus their efforts on clearing their defaults.

It’s crucial, therefore, for lenders to not only build near prime ranges that are more accommodating towards defaults and county court judgments (CCJs), but that also stretch to 90% LTV. Near prime borrowers deserve more support than they are currently getting from mainstream lenders. 

Rising to the challenge 

Given the warnings from councils about the financial challenges they face, rising bills are likely here to stay. As a result, in the years ahead, brokers will continue to see more and more clients who may have missed a payment or two, but who nonetheless represent an excellent borrowing prospect. 

It’s wrong for those short-term issues to hold back their borrowing prospects for the long term, which is why lenders must step up.

Unless we employ more realistic criteria and lending limits, we risk locking people out of the mainstream mortgage market, limiting them only to specialist lenders who cannot support them on the path back to prime.