"During the last five years, we’ve experienced Covid, a cost of living crisis, and seen the interest rate increase from 0.1% to 5.25%."
Taking a sympathetic approach to real-life credit scenarios is essential
When household budgets are squeezed so tightly, as they invariably have been for many borrowers over the past few years, something has to give – and that something usually translates to a missed bill payment or two.
The cost-of-living crisis, redundancies, and rising interest rates on credit cards and loans have resulted in more borrowers experiencing credit blips. As such, we are likely to continue seeing an increased demand for mortgages from those with complex credit histories.
This may not in itself be due to any fault of the borrower and rather be reflective of interest rates increasing so dramatically and quickly. As a result, there will be more defaults and credit issues as people adjust their income and expenditure during this period of adjustment when, as we would describe it, real life happens.
There are all sorts of other reasons why a borrower may have experienced a credit blip. It could be due to a life event, such as a divorce or temporary loss of income, or it could stem from a lack of money management and the need for a period of adjustment to higher interest rates.
Accounting for real life to ensure borrowers aren’t excluded
Which’s Consumer Insight Tracker for financial difficulty gives an indication of the extent of pressure on households. According to the tracker, around 7% of households have missed or defaulted on at least one mortgage, rent, loan, credit card, or bill in the month leading up to February 2024.
While in most cases, the monthly mortgage payment is often prioritised, this can lead to borrowers falling behind on unsecured repayments (such as loans or credit cards) or household bills. Falling behind on one or a couple of payments does not necessarily represent a long-term financial problem though, and some borrowers can find themselves back on track with their finances fairly quickly.
However, such borrowers may find themselves excluded from the mainstream mortgage sector, but there are lenders, like ourselves, who specialise in lending for real-life scenarios, catering to borrowers with complex credit histories, including past bankruptcies, county court judgments, or ongoing debt management plans.
People get credit blips, get divorced, or made redundant, all at the same time as the economic squeeze. So we have extended our reach to help more people get on the housing ladder – or stay on it, just as importantly – where the high street banks cannot help.
It’s also important to consider the situation of older borrowers. Debt and missed payments are not exclusive to younger borrowers. Real-life issues such as divorce and separation can also occur in later life. Being able to stretch repayments over a 40-year term and using downsizing as a viable repayment strategy can help alleviate some of the financial pressure for such borrowers.
We evaluate each case on an individual basis and consider the reasons behind the defaults, aiming to provide support where possible.
Taking a fair and flexible approach in a lender’s service
While offering a sympathetic approach to all borrowers with complex credit histories is essential, it’s also important to recognise and differentiate between those borrowers who would benefit from a credit repair mortgage and those who may not. As a responsible lender, we work with brokers to determine the suitability of a credit repair product and help identify those borrowers who may now be back on track financially.
Whereas in the past, a sourcing system may have only been focused on the best rate and not taken into account a borrower’s individual circumstances before conducting a search, sourcing systems are now able to produce much more personalised results, taking into account factors such as a borrower’s credit history.
Whilst this can save brokers time by narrowing down the search, there can be a range of factors alongside credit criteria, such as multiple or unusual income sources, or capital raising. In such cases, we’re happy to ‘pre-DIP’ cases for brokers, offering a ‘soft footprint’ search to determine the suitability of a borrower before they pay the application fee.
We have a cascade approach, both down and up the credit spectrum. We will cascade customers onto the best product we can offer based on the complexity and risk and publish our criteria on our website. So, when you think about those vulnerable customers that have been through a financial squeeze, we make sure that they’re put on an appropriate product.
Seeing the people beyond the profile
During the last five years, we’ve experienced Covid, a cost of living crisis, and seen the interest rate increase from 0.1% to 5.25%. So it’s safe to say there will be some borrowers who are in a less favourable financial position than they were when they last remortgaged.
As we continue to see consumer credit borrowing climb and the possibility of defaults increase, brokers may see more borrowers moving into the ‘specialist’ mortgage space. Whilst we refer to it as ‘specialist,’ it’s really about real people dealing with real-life situations, making it all the more important that they aren’t excluded from accessing the finance they need.
