It is a common misconception among many consumers that a history of poor or adverse credit can limit their chances of taking out a mortgage or buying a home.
While this may have been true in the past, the evolution of the mortgage market over the last decade or so means addressing the needs of these borrowers is now a priority.
There have been a number of economic challenges over the last few years, including the Covid pandemic, the cost-of-living crisis and higher interest rates. This has led to an uptick in debt levels and credit defaults as borrowers struggled to balance the demands of stagnant or real-terms falling income levels with rising living costs.
According to a recent Pepper Money Specialist Lending Study, 8.3 million individuals in the UK have experienced adverse credit in the last three years. This is the highest level recorded since the study was first launched in 2019.
The study also found that, although 1.76 million would-be borrowers with adverse credit have plans to buy a property in the next 12 months, there continue to be many misconceptions among mortgage customers about their chances of taking out a mortgage.
In fact, nearly a fifth of people who responded believed they would need to wait longer than five years to apply for a mortgage following a county court judgment (CCJ).
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Taking a common-sense view
Challenging these misconceptions is vital and presents brokers with an opportunity to raise awareness about the options available to those borrowers with a history of adverse credit.
Specialist mortgage lenders and smaller building societies, for example, will often use a more flexible approach to underwriting. This enables them to get a better understanding of the borrower’s credit history and the reasons behind their credit score.
Adopting an individual approach to underwriting is essential in helping these borrowers get back on their feet, particularly if they feel stuck in a negative cycle and believe their credit score is having an impact on their ability to secure a mortgage.
Individual underwriting also allows the lender to see if a credit default or missed payment is the result of a change in life circumstances, such as job loss or divorce, rather than a tendency towards debt. After all, the impact of life events can be temporary, and borrowers may well have gotten their finances back on track once things have settled down.
Empowering borrowers with flexible options
Removing the barriers caused by automated credit scoring models, by providing accommodating criteria and personalised underwriting, can help these borrowers feel empowered to move forward with flexible ways to manage their finances.
Mansfield Building Society’s credit repair proposition, for example, has been specifically designed to help borrowers who would typically fail the credit checks of high street lenders because they have experienced past credit problems.
This includes those who may have a history of missed payments, defaults, CCJs or even bankruptcy. They are also available to borrowers who may be currently seeking relief through active debt management plans (DMPs).
Borrowers can take out a mortgage of up to 70% loan to value (LTV) and capital-raising, transfer of equity and debt consolidation are allowed. Loan sizes of between £50,000 and £500,000 are available and applications from customers with a CCJ over 12 months old and up to a limit of £6,000 will also be considered.
Offering these straightforward and flexible solutions to borrowers with a history of adverse credit is important as it provides them with the ability to secure a mortgage and get back on track with their finances as quickly and as smoothly as possible.
Given the financial challenges faced by many borrowers in recent years, and the subsequent strain on household budgets due to higher living costs, it’s important that lenders work with brokers to enable and empower borrowers to navigate their financial circumstances effectively.
