It is easy to paint a gloomy picture of debt in the UK. Statistics and figures pile up to create a scary picture of how much money everyone seems to be spending, but it’s money that they don’t actually have. Just a few figures from Credit Action, the money education charity, are enough to make anyone sit up and take notice.
According to Credit Action, personal debt in the UK stood at £1.291 trillion at the end of December 2006. £1 trillion of that was secured lending, with the average UK household having £8,791 of debt outside mortgage loans. Britain’s personal debt is increasing at £1 million almost every 3 minutes.
With this is mind, it’s no wonder the non-conforming mortgage sector is in rude health. Increasing numbers of consumers with less-than-perfect credit histories are turning to the specialist market for help buying property. Yet, with many of these people falling into difficulties for fairly innocent reasons, what is being done to repair their credit and move them onto better, more mainstream deals?
Major hindrance
Nick Hanson, director of Hanson Financial Management, feels the structure of non-conforming products is a major hindrance to people moving back to a positive credit position and puts them under huge amounts of pressure. He adds: “People are being overly punished for missing payments or having a CCJ. People looking to get back on track and not take anyone for a ride are being disadvantaged by enormous fees and tie-ins. I feel you should only get someone onto an adverse deal if there is no other choice, as with an adverse product the client will, at best, be maintaining the status quo.”
Hanson states lenders should review mortgages at regular intervals and move clients onto more mainstream products. He adds the non-conforming market is not providing incentives for people to repair their credit, such as giving further discounts on their mortgage. He explains: “I understand why lenders don’t because of profitability and risk, but the economy is slowing, repossessions are up and I feel sorry for people who want out.”
Lender response
One lender that has created a credit repair product is Mortgages plc, with a one-year deal with no overhang. Customers can then remortgage, either to Mortgages plc or another lender.
Julian Wells, marketing director for Mortgages plc, comments: “I don’t understand why the product hasn’t been copied, but it can take a while for people to get their heads round the fact you can break even after a year. We developed this product on the back of brokers saying they had clients who just wanted to sort out their debt, but not be tied in for years. From a broker’s point of view, it’s a nice way to manage their client.”
Yet, for Paul Brett, chief executive officer of FML, the industry needs to encourage more status business, as he feels the huge increase in the self-cert industry has fuelled the rise in repossessions.
Figures from the Council of Mortgage Lenders show repossessions jumped by 65 per cent in 2006 to 17,000. It predicts this figure will continue its upward swing to 19,000 in 2007 and 20,000 in 2008.
Brett says: “Some argue self-cert keeps the industry buoyed up, but lenders don’t know if self-cert is a true reflection of a person’s income. Lenders need to increase status income multiples, as they will then get a true reflection of income. Ultimately it will reduce your arrears, as you know from the start what people can afford. We should look at income multiples reflecting current interest rates, as when interest rates were 15.75 per cent over 15 years ago, multiples were similar to now.
“However, income multiples generalise too much, so we also need to look at affordability, as we’re still working on a system that’s 20 years old. A lot of lenders are going that way and it makes sense.”
A wider view
However, Kevin Paterson, managing director of Park Row Mortgages, feels a much wider view is needed to help clients. “Clients should be given advice across the board and brokers should team up with specialists. Brokers have a duty of care to their client, while lenders have a duty of care with ‘Treating Customers Fairly’ to give reasonable rates, tie-ins and service. There is a big problem here, because if you get into trouble, getting out isn’t easy.”
There is no easy answer to this increasing problem of debt. People will continue to have to push their affordability to get on the property ladder as house prices increase and it is up to the industry as a whole to help people who fall into trouble with flexible products and sound advice.
