Why more customers could struggle with adverse credit

An online survey of more than 500 brokers, by Pepper Money and Mortgage Business Expo, has found that around 26% of brokers are concerned about finding a mortgage for customers with adverse credit in the next year.

With the economic outlook of the market uncertain, many brokers have questioned how customers struggling financially will be able to access suitable mortgage products.

Lewis Shaw (pictured), founder and mortgage expert at Shaw Financial Services, said conditions would only get more challenging for people with adverse credit, as lenders tightened policy and credit scoring to try to protect their balance sheets from defaults and arrears.

Shaw said the issue was not just placing the cases but administering them, and added that adverse lenders were notorious for wanting ‘chapter and verse, wet-signed declarations, direct debit mandates, and enough documents to sink a battleship’.

Without a shadow of a doubt, he believed the biggest issue buyers with bad credit had was to find a broker willing to take them on and not charge the earth.

“Of course, this depends on the level of bad credit we are talking about, however, these buyers are still at the mercy of eye-wateringly high broker fees from some businesses, simply because many brokers do not want the hassle and grief of dealing with the lenders in question,” Shaw suggested.

Therefore, many potential mortgagees found themselves online with 'specialist brokerages', with fees running into the thousands.

“There is nothing additional that can be done to help borrowers with poor credit; while I have every sympathy for people that have struggled in the past, the state cannot legislate for every eventuality,” Shaw said.

Pay back

Shaw believed the only thing that fixed bad credit was paying back what you owed - and on time.

“As Warren Buffet once remarked, ‘you cannot have a baby in a month by getting nine women pregnant’; similarly, you cannot make a CCJ debt management plan, default, bankruptcy, IVA, or repossession disappear by paying off all your other debt; it takes time,” Shaw said.

So, in a tightening market, Shaw said it was even more imperative that people paid everything on time, because once you got your card stamped, the repercussions lasted a long time.

Amit Patel, adviser at Trinity Finance, said adverse credit applications would increase as more and more borrowers ended up with credit blips, which in turn would impact their ability to secure a mortgage with high-street lenders, as they tended to only want to lend to people with a clean credit history.

Read next: Can people get a mortgage with bad credit?

Patel said adverse applications were time-consuming as the lender would usually ask for more documents and a detailed explanation of why the borrowers ended up in a financial pickle.

“It would be helpful if high-street lenders were more lenient towards borrowers with minor credit issues,” he added.

Graham Cox, director at Self Employed Mortgage Hub, said the biggest obstacle for anyone with adverse credit was mortgage affordability.

He added that high-street lenders tended to shy away from anything but the most benign bad credit issues, which meant customers were forced to use specialist lenders who charged higher interest rates.

“With the cost-of-living crisis impacting households, I expect all lenders will need to become more tolerant of defaults, CCJs over the coming years; it is a market segment only set to grow,” Cox said.

Tipping point

Scott Taylor-Barr, financial adviser at Carl Summers Financial Services, said while he did not usually struggle to place cases, he was struggling with the cliff edge in pricing that occurred.

“With some minor, or more historic, poor credit, it is often possible to place these clients on standard rates with mainstream lenders,” Taylor-Barr said.

However, he added that once a client's bad credit passed the tipping point and brokers had to look at specialist lenders to secure a deal, then the jump in both interest rates and set-up fees could be quite sharp.

Anil Mistry, director and mortgage broker at RNR Mortgage Solutions, said it was concerning to hear that brokers were experiencing challenges in finding lenders for clients with poor credit histories.

“Unless there have been very recent payday loans or very recent missed secured loans or mortgage payments, there should be a lender willing to consider such cases, albeit with a higher interest rate starting with a seven or even 10,” Mistry said.

He believed it was crucial for borrowers to approach a firm with access to a vast network of lenders to pair them appropriately.

Are you expecting to see a rise in the number of customers with adverse credit? Let us know in the comment section below.