The flexible sub-prime mortgage is still in its infancy and there are conflicting views as to whether it will grow much further. For now there are options for those clients who cannot be accommodated by the prime market, but want access to the kind of flexibility offered to other borrowers.
Mortgage plc has had a flexible sub-prime mortgage product on the market for over a year. Now Southern Pacific Mortgage Ltd (SPML) has launched its Flexi Mortgage for those with a history of credit difficulties.
Both providers protect themselves against the potential risk of their targeted borrower by only allowing the flexible options such as underpaying and payment holidays to apply once, or if borrowers have a surplus in their account.
This meets the most obvious concern about flexible sub-prime products, that people with a poor credit history are given the tools to repeat that history.
Dean Taylor, spokesman at SPML disputes the risk, to the lender at any rate. ‘Within our product range, the Flexi Mortgage is targeted at less credit adverse borrowers than our overall product book. It is no more risky for our business than any other product.’
Mortgage plc’s Freedom Mortgage rate is 2% on the standard variable rate for loans to value (LTV) up to 85%. Full status verification is required and a maximum of £2,000 County Court Judgements (CCJs) over the last two years are allowed. It will accept a maximum of four arrears in the last 12 months and no more than one payment missed in the last three months. Bankruptcy is not permitted.
Meanwhile, the rates on the Flexi Mortgage are applied on a sliding scale depending on the borrower’s credit history. Borrowers cannot have more than three months’ missed payments in the last 12 months and none in the last six months. Borrowers meeting this criteria can borrow a maximum of 60% LTV and pay 2% above Libor. CCJs up to £5,000 are allowed for this rate. The lowest rate of 2.75% above Libor on a 95% LTV requires borrowers to have no arrears and CCJs of up to £1,000 satisfied in the last 12 months. All applicants must provide references or statements for the last 12 months. The self-employed and employed workers can apply, but must provide, respectively, accountants’ certificates for the last year, or an employer’s reference, or P60 and payslips for the last six months. Self-certified borrowers are restricted to borrowing a maximum of 80% LTV. Bankruptcy cases are also permitted.
The products do have strict criteria for borrowers to meet. ‘We foresee all types of applicants who have fallen out with their high street lender due to CCJs or small arrears,’ says Taylor.
However, Barrie Jeffrey, Partner at C&J Independent Financial Advisers, does not agree with this definition of sub-prime.
‘Sub-prime is a woman with her husband in jail, no work, arrears on her mortgage and a bank with a charge on the house, waiting for the lender and bank to battle it out so that she can sell her house and move on,’ says Jeffrey.
‘Real sub-prime borrowers are grateful for what they can get ‘ the rates may be expensive, but for the majority they are realists and recognise the problem, take the pain over three years and get a track record and then we can move them on,’ he adds.
The essence of sub-prime has always been that borrowers are given the simplest means of borrowing and it can be argued that flexible products fly in the face of this simplicity.
Richard Stettner, managing director at Mortgage Master, says: ‘We get the best deal for the client, that will not cause a headache for everyone involved. Sub-prime lenders should try not to overcomplicate things and concentrate on providing flexibility in their lending criteria.’
‘In my experience most sub-prime customers are just relieved someone will lend them money ‘ these are not people with £40 in CCJs, which you could place on the high street if you are doing your job properly,’ says Jeffrey.
But, the argument of the flexible sub-prime lenders is that just because a borrower is sub-prime they should not be denied the options open to a prime borrower.
Paul Howard, sales and marketing director at Mortgages plc, says: ‘We think this is an extremely wise move, there is no reason why sub-prime customers cannot have prime products.’
There is a view the market should be seen not as one for those incapable of organising their finances, but more for those who have suffered a misfortune through bad luck, rather than incompetence.
It is as though flexible sub-prime offerings are suitable for those with more vision than post-panic relief in finding a mortgage and rate that gives them some grace while they get their credit history in order.
Taylor says: ‘We anticipate this product will attract the shrewder borrower who wants to take advantage of the benefits on offer. It will be appropriate for the self-employed or contract workers, who may have attracted a CCJ, because of the seasonal variation in income. This gives them control of balancing out the harder times until the income comes in.’
Taylor goes as far as to suggest that its flexible product, ‘is a product truly offering borrowers a chance to credit repair.’
For example, both Taylor and Howard state how a client needing to borrow 80% LTV, for example, could instead borrow 85% LTV and provided they did not spend the extra 5%, would actually be in a surplus position and take a payment holiday for the initial period of their borrowing. This provides them with a margin to sort out their finances and get on their way to becoming a prime borrower again.
Product providers are conscious of the risks to both borrower and lender and see their products as protecting both parties.
Howard says: ‘We are more cautious due to the nature of the target audience. There is no drawdown facility until the borrower has built up surplus payments. Given the history of these borrowers this is prudent. It protects us and them.’
Carving a niche
While the market may be divided as to whether flexible sub-prime is suitable or appropriate, there is a belief that there is a gap in the market, as Clive Parish, managing director at the packaging and processing division of Mortgage Brain, explains.
‘There is a place for the flexible option. Sub-prime borrowers cover the range of professionals and sophisticated individuals who through no fault of their own have attracted a CCJ,’ he says.
Parish also argues it is unfair to single out flexible sub-prime for criticism when even on more straightforward products, people can be sucked in to underpaying.
There are two reasons as to why there are so few flexible sub-prime products on the market. The first is that few providers have a system that can cope with the product and the second is that there is little demand for the product in the first place.
‘Flexible products are complicated because they are system driven,’ says Taylor. ‘We built a bespoke system some years ago because we knew we would want to do this.’
Howard holds a similar view: ‘Flexible sub-prime is more complex and more expensive to set up in the first place. Most sub-prime lenders are comparatively small which may be part of why they have not launched.’
But Howard concedes that, ‘demand for the product is not enormous ‘ it accounts for about 15% of our business.’
Parish, however, offers a more cynical view as to whether there is demand in the market. ‘The market is more about what lenders can get into, they have to continually adapt products to get themselves a place in the market. We have to ask ourselves whether the sub-prime market is contracting. In the past there were a lot of people with problems due to negative equity, but I am not sure this is an expanding market.’
Providers will no doubt watch this market to see whether demand is really there before launching products of their own. Pink Home Loans tried a flexible product at one stage, according to David Copland, sales and marketing director, but did not get too many takers.
Copland ponders on whether the success of the product is down to the sophistication of the borrowers or whether they attract the broker.
He says: ‘The concept of flexible mortgages really needs to come across in the sales process. Brokers categorise flexible mortgages as for those borrowers that fit the standard lending criteria and not the sub-prime market.
‘It took a long time for flexible products to take off, which may be due to inertia on the brokers’ part. It takes time to change the advice process and ask the questions necessary to sell flexible mortgages.’
Howard agrees the flexible sub-prime market has a little way to go before it becomes more commonplace, but nevertheless says his product makes an acceptable contribution to his overall business levels.
In the meantime, Jeffrey remains hopeful that the market will develop. He says: ‘I have not seen a market for flexible sub-prime yet, but I shall look forward to seeing it and will hopefully be able to take advantage of the benefits for my clients.’
Mortgages plc and SPML are currently the only two sub-prime lenders to offer flexible mortgages.
Underpayments and payment holidays can only be used once the borrower has built up a surplus in their account.
Flexible sub-prime loans have a place for self-employed or contract workers who have developed a poor credit profile through no fault of their own.