According to Atom Bank’s Near Prime Index, which is carried out biannually, around 76% of brokers are placing near prime cases due to defaults.
The report said these can “often be minor issues” but end up having a “major impact on a borrower’s mortgage prospects”. Near prime is consequently a “crucial option” for those who have had a small credit blip but are still a good prospect.
Arrears came to 38%, with prime credit score failures standing at 27% and county court judgments (CCJs) estimated at 12%.
Atom Bank noted that while the cost-of-living crisis is subsiding, consumers are still spending a significant amount on essentials, leaving “little room for shocks”.
In the latest quarter, around 9.7% said they had negative disposable income and 2.3% said they had up to 10% disposable income.
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Credit card debt and unsecured credit are also on the rise, with average outstanding unsecured credit coming to over £8,000 and average credit card debt per borrower standing at just over £3,300.
Missed credit card and unsecured loan payments are top credit issue brokers are seeing
When brokers were asked about what credit issues they were frequently seeing, 26% pointed to missed credit card and unsecured loan payments, and the same number cited unsatisfied defaults.
Approximately 21% pointed to missed utility payments and 16% said they were seeing satisfied defaults.
Atom Bank said “general life incidents and ongoing difficulties” were driving borrowers into near prime status.
It added that “one-off incidents” were having an “oversized impact” on people’s credit status and this was pushing them away from prime lending.
David Castling, head of intermediary distribution at Atom Bank, said: “These aren’t the ‘sub-prime’ borrowers of old, but people who have hit a bump in the road and deserve a more understanding approach from lenders. Brokers are the frontline in educating borrowers about the payment mishaps [that] will impact their mortgage prospects, but also why they still have options.
“The odd credit blip does not mean the borrower has no chance of acceptance, or will be stuck with high-priced, poor-value mortgage products. Demystifying near prime mortgage finance is crucial.”
Near prime borrowers have strong household incomes
Atom Bank said that looking at its near prime business showed there was a “significant proportion” that have higher-than-average household incomes, showing that “credit issues can impact anyone”.
For instance, 24% of near prime customers have an income of £30,000-50,000, compared to 16% of prime customers.
Going up to £50,000-75,000, around 36% of near prime customers fit into this bracket, which compares to 30% of prime customers.
Castling said the “lack of a safety net”, even among middle-income households, left people vulnerable to missed and late payments, which could push them into the near prime category.
More than half of near prime customers are first-time buyers
Looking at near prime customers in its book, Atom Bank said around 52% are first-time buyers, which is up from 43% of prime customers.
Castling said: “Accessing the market is becoming ever more difficult, with rising house prices pushing homeownership out of reach, while rents hitting record highs have made it more challenging to save a deposit.
“The make-up for first-time buyers has changed as a result – they are often older, more advanced in their careers, and while they tend to have a higher salary, that isn’t making life easier. If near prime first-time buyers are to have a hope of getting onto the ladder, they need access to higher LTVs as well as a more flexible approach towards gifting and deposits.
“The lending industry needs to recognise that being a first-time buyer is already an incredibly stressful time – if there is negative credit involved, these anxieties are magnified. First-time buyers therefore deserve a faster, more understanding service.”
Around 31% of near prime borrowers are movers, compared to 27% of prime customers.
For remortgages, 17% are near prime borrowers, which is down from 30% of prime customers.
Self-employed are a key near prime segment
Regarding employment status, around 90% of Atom Bank’s near prime customers are employed, which is in line with 93% of prime customers.
However, around 10% of near prime customers are self-employed, which is slightly up from 7% of prime customers.
Castling said that while it was a smaller proportion, there was a “distinct lean” for the self-employed needing near prime offerings compared to employed customers.
He explained: “One factor [that] can contribute here is self-employed borrowers may be left waiting for invoices to be paid, compared with employed applicants, who enjoy a more consistent income.
“Research from IPSE4 suggests the average amount owed to freelancers in overdue invoices is above £5,000, and those late payments can make it impossible to meet regular bills.”
Near prime borrowers most worried about high interest rates
Almost four in 10 near prime borrowers said their biggest concern when talking about their mortgage options was high interest rates.
This was followed by nearly a third saying they feared being rejected for a mortgage and 15% citing limited product choice.
One in 10 said the size of the required deposit was a key concern and 6% worried about the difficulty of meeting affordability.
Castling said: “There can be a real fear among near prime borrowers, whether that’s about the interest rates on offer, or whether they will even be accepted for a mortgage. Brokers play an essential role in educating borrowers about the options open to them, as well as combatting concerns about costs.
“Credit blips do not need to spell disaster for borrowers – however, large swathes of potential homeowners assume they need not apply.”
Near prime will grow but better rates and higher LTVs needed, brokers say
Brokers surveyed for the report said they expected the near prime segment to grow in the future due to “broader economic pressures”.
As a result, they expected more lenders to enter the market and offer a wider range of deals, which would benefit borrowers.
They called for a move away from automated decisions to a more human-centric underwriting approach.
Brokers said education was crucial in terms of making borrowers aware of issues that could push them into near prime and on the existence of near prime as an option.
They said there had been changes in client behaviour, with some taking a more “relaxed” view on credit commitment and the growing use of buy now, pay later (BNPL) services.
Brokers added that frustrations centred on the high cost of near prime deals, adding that at times, rates and fees are not “competitive”, especially as many near prime customers are not high risk.
They called for lower costs to make deals more accessible and said that higher loan-to-value (LTV) deals should be added.
Castling added: “The report points to a need for innovation, especially in generating more high-LTV options. We have seen striking levels of demand since increasing our maximum LTV on near prime to 90%, demonstrating how valuable such products are. Technology is too often seen as a barrier, with automated assessments making life harder for borrowers with adverse credit. But, when applied properly, it will mean near prime borrowers enjoy the same certainty at pace which is available to prime applicants.
“However, the key remains education. This outlines the value of the advice process, with brokers at the forefront of clearing up misconceptions about near prime, not only helping clients understand why they have dropped out of prime eligibility, but helping them return to prime status. Lenders must make that path back to prime as straightforward as possible – a minor payment bump in the road should be treated as such.”
