A failed credit score doesn’t have to mean a significantly more expensive mortgage.
Clare Jarvis is acting sales director and head of national accounts at Pepper Money
Last month, a glitch in the childcare payment system run by HM Revenue & Customs meant that 22,000 payments were delayed, and many nurseries and childminders were left unpaid.
Redundancy and divorce are frequently cited as common reasons for credit problems but often, for the self-employed, being paid late or not at all can be enough to shift the balance of their finances.
Following last month’s glitch, Childminder, Kelly, said in a BBC report at the time: "I was only out of pocket by £300, so not as extreme as some others. I could survive, and I did manage to pay my bills, but this is only because my partner and I share money. If we had separate finances £300 would have disrupted my ability to meet the bills.”
The importance of cash flow
Cash flow is paramount to any business, particularly a small business, yet according to the Chartered Institute of Credit Management, more than 27% of invoices are paid late, beyond the agreed terms.
When Carillion collapsed at the beginning of the year it was estimated that as many as 30,000 small businesses were owed money by the construction and facilities management firm, and these were generally small firms and individual contractors who were left with a hole in their cash flow.
The consequence of being paid late, or even not at all, is felt most keenly when it comes to meeting regular outgoings, such as credit commitments and utility payments. If a self-employed worker has not been paid promptly for their labour, then they might understandably struggle to meet their obligations, and this can negatively impact their credit record and therefore their ability to secure borrowing in the future.
Cost of a failed credit score? Less than takeaways
One of the many myths surrounding borrowing is that a failed or low credit score means a borrower won’t be able to secure a mortgage. Instances such as being paid late for example, can impact a person’s credit score if they’re unable to meet their credit commitments.
However, this doesn’t mean it’s impossible to secure a mortgage. A failed credit score doesn’t have to mean a significantly more expensive mortgage either.
For example, Pepper Money’s lowest 2-year fixed rate on Pepper 48, for clients who haven’t had a CCJ or default in the last 48 months, is available for 2.17% up to 65% LTV.
A NatWest 2-year fixed rate mortgage at the same LTV currently costs 1.73%. This seems like a considerable difference but, on a £150,000 mortgage over a 25 year term, the extra cost is just £32 a month.
In this instance, the cost difference between Pepper Money, and the most expensive high street lender is just £32 a month. This is less than half the average amount of £80 a month that people in the UK spend on takeaways, according to research by Deliveroo.
There are many reasons why your clients might fail a credit score, and a cash flow crisis is just one of those but working with a specialist lender that can look beyond a score, can help you to secure an affordable mortgage solution and hopefully a happy client.
