Speak to any mortgage broker at the moment and they will tell you that they are seeing more clients who fall outside of the ‘prime’ category.
The past few years have been rough financially for many people, and that has taken its toll on the credit profile of would-be borrowers. While these clients are on surer footing today, and well placed to maintain payments on a mortgage, these historical hiccups are causing havoc with their borrowing prospects.
One of the issues that brokers have come across, and which is causing difficulties when trying to work with clients who have experienced payment problems in the past, is the approach to unsatisfied defaults.
These clients may be excellent borrower prospects, and have credible plans in place for paying off what they owe, but because of the size of the unsatisfied defaults they are being excluded.
It’s something that we have looked to address at Atom bank through recent changes to our near prime criteria. Where previously applicants were limited to having £1,000 of unsatisfied defaults, they can now have up to £2,500. Importantly, that cap applies only to the size of their current debt, rather than the initial charge – if the borrower is making progress on repaying what they owe, then we want to support them.
There has also been a broadening of the criteria on specific areas those defaults can come from, increasing the cap on unsatisfied defaults from communication and utility bills from £250 to £500. These are areas where bills have increased substantially in recent years – indeed, energy bills have consistently been highlighted as one of the biggest worries for those under budgeting pressure, so it is only sensible to reflect these rising costs in the form of a higher cap.
Ultimately, if you are serious about supporting these borrowers, then the criteria has to be realistic in matching their actual circumstances and needs. We are confident that these changes will mean Atom bank is able to support far greater numbers of near prime applicants who may have found themselves at a dead end when looking for options with other lenders.
The path to prime
It is sometimes overlooked that while a client may fall into the near prime category at the moment, that doesn’t have to define their future mortgage experiences. The fact they may have defaults in their history can be overcome with time, and they can work their way back into prime status.
That journey takes work, however. From the lender perspective, there’s plenty that can be done to ensure the borrower enjoys all of the support they might need. At Atom bank, for example, we conduct proactive monitoring of the accounts of near prime customers, giving us a better chance of spotting the warning signs of any payment issues they may be experiencing.
In addition, we have removed the missed payment and arrears management fees. If these borrowers do once more experience issues, then the priority really should be ensuring they can get back on track, which is going to be much harder to do if they are also having to deal with additional penalty fees from their lender.
When a borrower’s fixed rate matures, should their circumstances have improved sufficiently, then they will be offered a prime rate. There is a built-in path back to prime, and we’re seeing borrowers benefit from that right now.
In contrast, placing a client with a specialist lender means that if and when their circumstances improve, they will nonetheless only be offered another near prime rate. The result is that they may be left paying more each month on their repayments, hindering their chances of further improving their finances.
Responding to borrower needs
The reality is that near prime is not going anywhere – if anything, the need for lenders to take a more balanced approach to borrowers with the odd credit blip is going to become more acute. After all, recent data from the Financial Conduct Authority (FCA) suggests that around 7.4 million adults in the UK are struggling to pay their bills, feeling ‘heavily burdened’ by their outgoings.
If those struggles turn into a default or two, then they will need options from lenders who are prepared to take a more rounded view, rather than rule them out entirely.
Brokers will be key allies in pinpointing where gaps in the market are, which sorts of borrowers are being underserved and which lenders can help them, but it’s then up to lenders to make use of that insight and ensure their products truly work for these borrowers.
Our recent criteria improvements were made following direct feedback from brokers, demonstrating how crucial it is for lenders to make use of the relationships established with intermediaries.
It’s only by delivering realistic criteria, that matches what borrowers genuinely need, that we can ensure mortgages are accessible to all who merit them, even if they have the odd credit hiccup in their past.
Richard Harrison is head of mortgages at Atom bank
