In a time when Britons are borrowing more than ever, and the ‘live for today’ ethos, it is no surprise that many people are struggling to make ends meet and possibly falling behind with their repayments. The fact that County Court Judgements and mortgage arrears hit record highs in 2005, underlines the issues that many are facing.
Julia Harris mortgage analyst at moneyfacts.co.uk, commented: “Latest figures from Datamonitor estimate that 9.1million people were refused credit by mainstream lenders in 2005, with these figures only anticipated to grow. This level of declined applications can be partly attributed to poor money management on the consumer’s part but also the tightening of credit policy by mainstream lenders.
“With such a large number of borrowers now seemingly ineligible for mainstream or ‘prime’ lending products, mortgage lenders certainly do not want to miss out on this large and potentially lucrative market, hence the birth and rapid expansion of non-conforming lenders, often backed by investment banks such as Morgan Stanley, Lehman Brothers, Merrill Lynch and Investec. Increasing numbers of financial institutions are launching into the non-conforming market; for example, last week Alliance & Leicester dipped their toes in the water, offering products through Premier Mortgage Services.
“Over 4000 different non-conforming mortgage products are currently available, depending on the consumers level of adverse credit. A variety of fixed, variable and discounted rates are available for all borrower groups, including self-certification for the self-employed.
“These mortgages are not complex, and rarely come with any form of incentive. Also fees tend be higher, loan to value's lower and rates are generally higher than those in the mainstream mortgage market. Basically, it’s not the products that are difficult to understand but knowing how to find the most suitable products, which can prove to be the real challenge.
“There is an extremely wide spread of rates, dependent upon the level of adverse credit, ranging from rates below SVR, to rates above those you would expect to pay for unsecured loans.
“Knowing which mortgage provider to choose can be a very daunting task. Non-conforming mortgages are not as widely advertised as ‘prime’ products and because few products are directly comparable, there are no lenders or products that stick out as ‘best buys’ so trying to find the best rate/deal can be extremely difficult.
“Within the 28 lenders listed in Moneyfacts, there are over 180 different permutations of adverse credit on offer. So rather than looking for the ‘best rate’ it is important (but quite difficult), to determine which level of adverse criteria you fit in to. So when beginning your mortgage search, your usual searching criteria is reversed, firstly you need to find lender(s) which will accept your particular financial position and then you can start to look for the best deal.
“However, if you have a CCJ or arrears, don’t automatically assume you cannot take a mainstream mortgage as some lenders will accept some ‘minor debt’. Examples include The One account, will look at cases where borrowers have a CCJ of up to £1,000 and Manchester Building Society will accept 2 CCJs in the last year of up to £1,000 and one arrear in the last year, on their whole product ranges.
“The majority of non-conforming mortgages are only offered through intermediaries or brokers, who will still suffer the same problems in finding the most suitable mortgage, so it may be a equally grey area for them too. Additionally, as recently reported in the mortgage trade press, you may find that commission fees increase the higher the level of adverse credit, due to the supposed increased level of work involved in fully assessing this potentially more complicated case. So there is potential temptation to over estimate the client’s position in order to obtain a bigger fee.
“In cases of severe financial difficulty it is strongly recommend that consumers seek advice from the Citizens Advice Bureau or an impartial advisor in order to fully review their own particular financial circumstances.
“We already know that the Financial Services Authority has recognised the flaws within this market and will begin an investigation in September. The findings of the last study concluded that too many cases did not show correct procedures relating to suitability being followed. Any move which increases knowledge and transparency is welcomed, and we eagerly await the FSAs recommendations.”
