The ‘sub-prime’ market is back in business

The “sub-prime” mortgage sector shut down following the financial crisis in 2007-08, but brokers say more and more lenders are returning to the market – with some willing to lend to people who were bankrupt as little as a year or so ago.

On 30 June new retail bank Masthaven became the latest company to open its doors to people who have suffered financial problems, such as one or two missed mortgage payments, or who have county court judgments against them, depending on how big and how recent these CCJs are.

Meanwhile, some of the existing players have been cutting the cost of their deals. Pepper Homeloans, which caters for those with “credit blips or previous financial difficulties” recently announced it had “slashed” rates on some products.

Its sales director Rob Barnard was quoted as saying that “adverse credit records remain on file for 72 months, despite the fact that borrowers may have conducted their finances in an exemplary fashion in recent years”.

Everyone in the financial services industry is terrified of using the term “sub-prime” – in short, mortgages for people with poor credit histories – so you will notice that a new lexicon has developed to describe the market, with “impaired credit”, “credit repair” and “complex prime” among the labels commonly used.

It divides into the “light” impaired, where someone has had a small default posted on their credit score for a small sum, usually put there by a mobile phone company; through to “heavy adverse”, which will be people whose credit score has been wrecked by bankruptcy, serial defaults, CCJs and IVAs (individual voluntary arrangements).

This is a “not on the high street” market. Most, if not all, the sub-prime lenders are specialist companies that only sell through brokers. The names most commonly mentioned are Kensington Mortgages, Precise Mortgages, Bluestone, Pepper Homeloans and Magellan Homeloans, with Vida Homeloans another relatively new entrant.

The “lighter” the impairment, the lower the interest rate – and vice versa. So someone light impaired may be offered a two-year fixed-rate deal at below 2.5%. Pepper Homeloans has introduced some mortgages starting at 2.28% aimed at those “who marginally fail a credit score”.

However, those emerging from serious financial problems will, in some cases, be offered 8% or more. One of the highest rates we found was a three-year fix from Magellan at 8.2% up to 70% loan-to-value.

“At the lightest end of the market is Kensington, which has a ‘tiered’ approach. It is just off the high street, so to speak, willing to overlook minor credit issues. You’ll pay around 1%-1.5% higher than the main lenders on the high street,” says Peter Gettins of brokers London & Country. “Precise, at its most extreme ‘tier 5’ level, will look at you if you’ve had up to five defaults in the last couple of years.”

A huge increase in the number of defaults posted on credit files by mobile phone companies, often for trivial amounts – an issue that Guardian Money has highlighted on a number of occasions – is driving a lot of the new activity. “We are seeing more leniency on defaults which have been registered by phone companies,” says Gettins.

Meanwhile, Ray Boulger at John Charcol says potential borrowers who have been turned down for a loan because of a minor default should consider smaller building societies. They do “manual underwriting”, which means an individual will assess the applicant rather than a “computer says no” approach.

But what about those with extremely poor financial histories? Gettins says Bluestone will consider applicants who have come out of an IVA or bankruptcy at least three years ago, and will overlook up to four missed mortgage payments. He adds: “Magellan is probably at the most severe end. It will offer loans to bankrupts discharged just a year ago. But rates are in the 7% region. That said, they do have strict rules about your financial record over the past 12 months.”

The brokers say that while they accept concerns about poor lending decisions in the past, criteria are very different today. Borrowers have to go through the same affordability testing as conventional applicants, and will have to put down a substantial deposit – usually around 20% of the value of the property they want to buy. The lenders are keenest to look at individuals thrown off course financially by a “life event” but who are back on track.

“There is an obligation on brokers and lenders to check that the borrowing is sensible and appropriate,” says Gettins. “The days of ‘self-certified’ loans [where borrowers could name their income without it being checked] are long over.”