Atom bank published its first Near Prime Index, which found there was a need for more education, flexibility and automation in the mortgage market.
The index showed credit issues affected households at all income levels.
Around 20% of Atom’s Near Prime cases involved households earning £75,000 to £100,000, and 10% were from those earning £100,000 to £150,000.
Over half (52%) of Near Prime cases were first-time buyers (FTBs).
Richard Harrison (pictured), head of mortgages at Atom bank, said: “Our proposition really helps support FTBs.
“We’re very committed to supporting homeownership, and our move into 90% LTV has been a key part of that strategy.
“It’s resonated strongly with both brokers and borrowers. If you look at the wider market, affordability challenges for FTBs are more pronounced than ever – the difficulty of saving for a deposit, general cost-of-living increases, high rental costs – all make it harder to get on the property ladder.”
Harrison added: “That’s probably pushing more people into near-prime territory, especially if they have little or no credit history and don’t quite fit the ‘cookie cutter’ approach of the high street lenders.”
Its index also showed that a higher proportion of Near Prime customers were self-employed than employed, suggesting income fluctuations can make it harder to get Prime finance.
Harrison said: “There are still some restrictions out there for self-employed borrowers. Self-employed borrowers may not have access to higher loan-to-incomes or higher LTVs.
“So it is definitely tougher for certain groups of self-employed applicants.
“That said, we’re open for business for the self-employed, and you can see that in our data: we have a higher proportion of self-employed borrowers in our near-prime range compared to our prime range.”
Additionally, brokers said the biggest worries for their Near Prime clients were high interest rates (39%) and fear of rejection (30%).
Harrison said: “I think the fear of rejection often stems from uncertainty, and we’re working hard to raise awareness about our offering.
“We communicate very clearly with brokers so they know exactly what we can do for their clients.
“Our high level of automation is a big plus – brokers get quick decisions, thanks to automated property valuations and income verification.”
He added: “That means borrowers aren’t stuck in a drawn-out underwriting process, waiting weeks to find out if they can proceed.”
Additionally, brokers said demand for Near Prime mortgages was likely to grow because of economic pressures and the rise of ‘buy now, pay later’ services.
They want lenders to use a common sense approach and look at each case individually, with pricing based on actual risk.
Brokers also said technology should help, not hinder, Near Prime borrowers.
Education was seen as key to helping people avoid falling into Near Prime and to get back to Prime status.
Harrison said Atom bank’s approach is to focus on long-term customer relationships, with the aim of helping people into homeownership and then onto better products through remortgaging.
He stated that as customers’ circumstances improve, the bank does everything it can to support them in moving to a prime product within two to five years, so they can benefit from more competitive rates.
He said: “This inaugural Near Prime Index has allowed us to take the pulse of what’s happening in the mortgage market for borrowers with imperfect credit scores.
“And what’s clear is that while this is a segment of the market which seems set to grow, brokers are frustrated with the approach of some lenders.
“Near Prime is not something which only applies to a certain subset of borrowers – a single payment issue can have a large impact on a borrower’s record, and they are often driven by a life event or incident rather than ill discipline.”
He added: “As a result, it’s vital for lenders to be more open minded, to treat such cases proportionately and based on the individual factors at play.
“We’ve seen strong growth from the changes we’ve made, and I think the market itself is going to grow.
“The challenges we’ve seen recently – high inflation, rising rates, affordability pressures – aren’t going away soon.”
He said: “Both first-time buyers and remortgage customers are facing these issues, especially as more people come off low fixed rates. So, I think the near-prime market will only become more important.”
“We’re seeing some very strong customer profiles coming through, often people whose needs aren’t met by mainstream lenders.
“Brokers should be aware of the changing demographics and the increased demand in this segment.”
He added: “From our side, we’re working hard to make the process better through automation and by helping customers move to prime products as soon as they’re eligible.
“Near-prime shouldn’t mean settling for less – it’s a stepping stone to more flexibility and better deals in the future. We want to be a one-stop shop for that journey.”
David Castling, head of intermediary distribution at Atom bank, said: “The report points to a need for innovation, especially in generating more high LTV options.
“We have seen striking levels of demand since increasing our maximum LTV on Near Prime to 90%, demonstrating how valuable such products are.
“Technology is too often seen as a barrier, with automated assessments making life harder for borrowers with adverse credit.”
Castling added: “But, when applied properly, it will mean Near Prime borrowers enjoy the same certainty at pace which is available to Prime applicants.
“However, the key remains education. This outlines the value of the advice process, with brokers at the forefront of clearing up misconceptions about Near Prime, not only helping clients understand why they have dropped out of Prime eligibility, but helping them return to Prime status.
“Lenders must make that path back to Prime as straightforward as possible – a minor payment bump in the road should be treated as such.”
