A growth in the number of clients with adverse credit was already being forecast, following research from Pepper Money last year.
This week Mortgage Solutions is asking: Could current circumstances see the complex borrower market grow further than predicted and will they be well catered to?
Since 2009, mortgage lending criteria has progressed without much interruption.
We’ve gone from ultra-restrictive, lending mostly to those in full time employment, where anyone with even a sniff of a late payment was paying nine per cent, to now (pre-Covid) zero hours workers and the self-employed at 12 months, with all manner of heavy and recent adverse credit issues – at incredibly affordable rates.
Still, I’d say the specialist market has been underweight for years, with many customers not even bothering to look at homeownership as they wrongly don’t feel like they’d be eligible, petrified of what a search on their credit file would do to their lives.
The last four months has expedited the changing world of work and lenders are having a tough time establishing the viability of different incomes across business sectors and contract types, particularly with the self-employed.
Add to that a potential rise in unemployment, credit issues, and of course the unseen impact of payment holidays, and you’d credit Covid-19 for delivering the biggest change to lending policy since the Mortgage Market Review, or even, 2008.
We’ve seen this before – whenever it gets tough to find a deal on the high street, the opportunity for specialist lenders grows, and those that can raise the money step in.
The demand will undoubtedly be there, the supply remains unknown.
To me the biggest question surrounds how quickly certainty and confidence returns to the market – all eyes on the vaccine, and the government for this, but I’m quietly optimistic.
In light of recent events, I think it’s inevitable that the complex borrower market will grow. With so many impacted by Covid-19 both, directly and indirectly, I think it’s safe to say UK mortgage lenders will have to respond.
With regards to the impact on a borrowers’ credit history, lenders are faced with the unenviable challenge of determining which borrowers remain credit worthy in a post-pandemic world.
This may remain a challenge for quite some time as fragility is widespread across so many business sectors, with income reduction and loss of work high on the list for reasons why customers fall into default on their credit commitments.
As with the last financial crisis, I think it would be safe to assume we will also see a significant rise in self-employment, which was approximately an increase of ten per cent following the previous crisis.
All this presents further significant challenges to lenders. To ensure this vast cohort of potential borrowers are not ostracised, a review of lending and risk policy will be an inevitability.
How lenders respond to all of this, alongside rising unemployment levels and the uncertain future of house prices is yet to be seen. Though I am sure CEOs of all UK lenders will be asking their teams ‘how do our lending policies become more agile while still mitigating increased risk?’.
One way lenders may respond is to implement a rate for risk models that allows them to price mortgage products relative to the associated risk.
This is already common in other areas of financial services, such as credit cards and personal loans.
We fundamentally look at clients who have an individual voluntary arrangement (IVA) or had an IVA and we’ve noticed the market has been growing for years.
The growth of this kind of client will increase and in terms of lender choice, I think we will see some new entrants into the market. The only issue will be with funding as specialist areas still don’t have the support of the government.
Rejecting people who have taken a mortgage holiday can push them into a more specialist category, but this is unprecedented.
The government said, ‘don’t worry, make use of mortgage holidays,’ but lenders weren’t prepared. They quickly had to rewrite everything. It was carnage.
As a result, it does raise questions around the perception of these clients now. How will these borrowers be construed; will they be reprimanded? We don’t know for sure.
If lenders can see income coming in but the borrower is on a mortgage holiday, how will they look upon that? For example, I have heard lenders say they will be looking closely at landlords who still have rent coming in while on a payment break.
Because of this, I can see the market being manipulated or changing in the coming months as lenders have to be careful about how they operate moving forward.
Understandably, they are worried also about certain incomes and employment sectors. Lenders will be stringent and looking at individuals on a case by case basis.