With figures from the Council of Mortgage Lenders reporting that mortgage lending is still rising (up to £20.5bn in November 2002), the housing market is booming, conclusive proof ‘ if any were needed ‘ that we are becoming a nation of homeowners, rather than a nation of shopkeepers. And with six out of 10 Britons valuing their property ownership over their jobs and cars, it appears this will only increase.
For many clients, owning their own home will be a top priority ‘ nothing out of the ordinary there ‘ but as advisers are all too aware not every case is ordinary and, consequently, not every lender is as willing as the next to approve an application.
How familiar is this scenario ‘ a client can comfortably meet the repayments and has a sizeable deposit, but even so the deal cannot be placed with a mainstream lender. If the averages are to be believed, at least one in four borrowers will be classed as ‘non-standard,’ ‘non-conforming,’ or ‘sub-prime’ by many traditional lenders and so the application will be refused ‘ point blank. The fairness of this decision is a bone of contention in the industry and one that is the subject of ongoing debate between lenders.
Catering for the masses
Every lender has different criteria which it applies to its decision-making. For example, many high-street or traditional lenders cater to the needs of the ‘masses’ who have standard mortgage requirements, so they use a standard credit-scoring system which is quick and painless ‘ like a mortgage conveyor belt. This system will score based on previous credit history to decide the level of risk it thinks your client poses if it agrees the loan. Each lender will have its own set of rules governing how it weights this criteria, based on what it thinks makes a safe bet, and this is where specialist lenders can add real value as they understand not everyone’s mortgage needs are straightforward.
While lenders do not hold credit information about every financial transaction potential borrowers have made, they subscribe to a credit reference agency that holds this information. A credit file will reflect details of electoral role registration plus a full credit history of previous and existing credit payment arrangements. With these reports there is no hiding place as missed payments are also highlighted ‘ and are not good news.
The following are the main elements of the credit score: electoral role, credit history ‘ as explained above, current address, current employer, time with bank, county court judgements (CCJs) and frequency of recent financial applications made.
If the first-choice lender refuses the application, it is usually for one of three reasons: first the information could be wrong; second, if the client has difficulty proving income, for example, if they are self-employed; third, if the credit history shows up any adverse credit.
If your client is wrongly represented in the report, it can be frustrating to both parties, and the lender is under no legal obligation to divulge the reasons why they failed the score. But under their code of conduct, lenders are obliged to tell your client whether they use a credit reference agency.
Clients can write to the agency and request a copy of their credit file for a small fee. If the information they hold about them is incorrect and they can prove it, they can appeal against the decision ‘ but there is no guarantee the original decision will be overturned or how long it will take.
Their credit record could also show there was a dispute, and that there may not be enough information available for a search. Under data protection laws they can appeal against any automated credit-scoring decision and request their case be manually underwritten ‘ the decision could change, but there are no guarantees.
At least 10% of the working population in the UK work for themselves and many more are on short-term contracts. For tax reasons, a self-employed applicant may want to certify their own income without a lender insisting on seeing full audited accounts. More than 27 lenders provide a self-certification (self-cert) option for their loans, so while the client has to provide details of income they do not need to prove it. In reality, however, most lenders will still require an accountant’s certificate which verifies they are good for the loan amount, bank statements and/or a credit score or search as part of its underwriting.
Many lenders offer self-cert loans up to 85% loan to value (LTV), on a similar or even same basis as full status applicants. This means clients are not penalised with higher rates or additional fees ‘ but be careful, self-cert may not be all it professes to be and they may still have to provide additional information you did not bank on.
If your client needs more than 85% LTV, it is likely they will need to provide three years’ accounts to show their net profit is not sufficient to meet the loan repayments, so you may have to explore their options further.
If one leading specialist lender is to be believed, then at least one in four of us could face financial difficulties caused through ill health or lack of preparation for lifestyle changes or future emergencies. In fact, many people get themselves into these situations due to unforeseen events in their lives, such as divorce or redundancy. It is too easy to fall behind, miss mortgage or other repayments and end up in arrears. It does not take much to dirty a credit record, in fact something as simple as a missed payment to a book club or store card can result in a ‘black mark,’ causing no end of strife. Or it could be far more serious such as bankruptcy or CCJs, but either way, getting a mortgage agreed for your client with a mainstream or high street lender could be tantamount to banging your head against a brick wall.
Whether their credit history is less than perfect or they need to self-certify their income, specialist lending can help. Mortgage intermediaries say around 21% of their business is ‘non-standard’ or self-cert and predict almost a 7% rise this year alone.
James Mayne, head of strategic development at Britannic Money, says: ‘Lenders have responded favourably to the increased demand for non-standard mortgages and most financial circumstances are now catered for.’
And they are, but if a client fits into either category advisers should be prepared for higher mortgage rates, as they are viewed as higher risk. The usual routes are available, for example, fixed, capped or discount rates and we have seen a move towards more flexible mortgages with several new market entrants. Flexible mortgages with an overpayment facility mean borrowers are no longer restricted to a rigid monthly routine as the ability to overpay can help reduce the outstanding debt, provide a safety net in case of future difficulties and save thousands in repayments.
For any self-employed clients, this can be a bonus as it can tide them over when they are between contracts by paying their mortgage payments ‘ preventing them from slipping into arrears.
However, any customers with an impaired credit history will more than likely have their eligibility linked to their level and type of financial difficulties. Criteria ranges from ‘light’ ‘ for example, up to £3,000 CCJs per applicant, bankruptcy discharged over 12 months, up to two months’ mortgage arrears at application (not in the last six months); to ‘medium’ ‘ for example, up to £10,000 CCJs per applicant, bankruptcy dis-charged over six months; to ‘heavy’ ‘ for example, unlimited mortgage arrears, unlimited CCJs or discharged bankruptcy. This is where your advice will prove invaluable.
If your client repays their mortgage consistently for about three years, it is more than likely their credit record will be cleaned up, freeing up their choice for a remortgage in the future.
Times have changed as clients, who may have previously been refused a mortgage, now have a real choice when it comes to borrowing for their home. Whatever their situation, there are options available. And remember a loan is not for life, and once credit is repaired the options are virtually endless.
Rachel Ramsden is head of marketing at Britannic Money
One in four borrowers will suffer financial difficulties during their working lives, not surprising when one in three marriages ends in divorce.
Borrowers choosing a flexible mortgage should overpay when they have the money to protect against future problems.
A client with a poor credit history will typically have to remain on a sub-prime rate for three years to ˜clean up’ their credit record.