"The mortgage market simply cannot function if lenders insist on only servicing the ‘cleanest’ of applicants, if their efforts are restricted to solely those with an impeccable credit history."
The concept of near prime has a certain stigma for some, an unwarranted reputation by those who bear the scars of the financial crisis. It’s important to draw a distinction however between adverse and near prime.
The latter is designed for those who have suffered the odd credit blip in the recent past, a late payment or two, rather than those with more substantial and/or sustained financial issues.
This difference is crucial to understand, given that near prime lending is only likely to be in greater demand in the years ahead.
The economic challenges of the last couple of years have clearly put household budgets under strain, to the point that greater numbers have experienced some sort of payment issue. This isn’t restricted simply to those on lower incomes either; we have seen first-hand a number of would-be borrowers on larger incomes who have experienced a credit blip and so require funding on a near prime basis.
Despite this growing trend, it’s equally true that this is an area of the market which is currently underserved by mainstream lenders, a situation which simply has to change if we are to have a properly functioning mortgage market.
Computer says no
While Atom Bank is a lender that is very clear on the benefits that technology can bring to all sorts of mortgage borrowers, an over-reliance on credit scoring and a tick box approach to applications can make things harder for borrowers who fall within the near prime category.
This is down to the way that it has been implemented, though. Where lenders have relied on automated decision making and credit reports, it has been those customers with credit blips who have been most harshly treated, suffering rejections due to the tiniest of black marks on their record.
That’s why it’s so important to get the balance right between technology and the personal touch. Technology can take on some of the heavy lifting in an application - handling the valuation for example - leaving the underwriter to spend their time focusing on what’s really important, establishing whether this really was simply a one off or a more fundamental issue.
Similarly, technology can be put to better use in educating brokers about a lender’s position on near prime, what their target market will be. Being clearer about the sort of cases they can take on, and those they cannot, will mean that brokers are more likely to only submit suitable deals, saving everyone time and effort.
There can also be a role for technology in boosting the delivery of near prime products. Currently there is too much emphasis on brokers having to memorise the policies of the lenders active in this market, to be able to recall - seemingly at a moment’s notice - which lenders are able to support a specific case.
No doubt some brokers are able to do that, but it’s certainly asking a lot of the intermediary community to remain on top of this, particularly given the speed with which the mortgage market moves. Brokers are busy enough, without also having to memorise changing rates and criteria for near prime clients.
This is where sourcing systems could help massively, making it easier for advisers to swiftly identify the right lender for near prime cases in much the same way as they do for prime ones.
Taking a long-term approach
It’s important to bear in mind that near prime does not have to be a long-term categorisation of a borrower. That short-term blip should not define the client or their borrowing prospects for longer than is necessary.
The idea is to support the client with their needs now, with the aim of helping them move back into prime status in the future. At Atom Bank for example, once the initial fixed term comes to an end, we are able to offer the client prime terms for refinancing, should they demonstrate an improvement in their financial status.
That’s not going to be an option if brokers rely on specialist lenders, who are only able to compete in the near prime sphere. Working with the right partners can mean longer-term support for those clients who can evidence an improving financial situation.
Building a better mortgage market
The mortgage market simply cannot function if lenders insist on only servicing the ‘cleanest’ of applicants, if their efforts are restricted to solely those with an impeccable credit history.
Not only is this completely unrealistic, it’s also wrong. Just saying no to clients who have a blip in their history is not fair or right. Instead the focus needs to be on doing a better job in supporting all potential clients, with more informed decisions around whether those applicants can genuinely afford the loan rather than a fixation on a minor historical issue.
We can do better as an industry. Rather than using automated decisions to turn them down based on a credit check, mainstream lenders need to find a better balance in using technology to support these would-be borrowers, with a focus on improving communication and processes. Getting that balance right is something we are passionate about at Atom Bank.
The last few years will continue to have an impact on the finances of all sorts of borrowers in 2024 and beyond. But working with the right lenders means that there will still be competitive, long-term options for those who have dropped out of ‘prime’ status.
