Borrowers with a minor slip-ups on their credit file are growing in their number but a lack of bad credit lenders serving the near prime market means many will be paying more for small mistakes.
With the economic fallout from Covid and a prolonged period of the economy stagnating, its no wonder that adverse credit is on the rise.
However, whilst there are specialist bad credit lenders whom will work with discharged bankrupts and those whom have seen out their IVA’s its the near prime adverse mortgage market that is under-represented and even the small mistakes such as a couple of missed payments can prevent borrowers from securing a competitive rate on their mortgage.
According to the latest figures from Pepper Money’s 2024 lending study, more than eight million people have experienced adverse credit in the last three years, which is the highest amount the lender has ever recorded.
Meanwhile, Atom Bank says it received a record number of near prime mortgage applications in Q3, up 47% on last year and the highest number received since it launched the range in 2021.
Bad credit mortgage brokers also say they are seeing an increasing number of applicants who have light arrears such as a missed credit card, utility bill or unsecured loan payment caused by an increase in the cost of living and higher mortgage rates.
Tony Higham of Adverse.Online explained how he had seen an increase in light adverse but also mentioned one troubling case were someone whom had a 999 Experian score plummet because of incorrect bad credit markers placed by energy supplier OVO. Tony explained “I had this one scenario where the client had a dispute with OVO that OVO even admitted its wrongdoing to the Ombudsman and that it would remove the incorrect late payment markers but a year on, OVO had still ruined this guys credit, though no fault of his own.
But a gap in the near prime mortgage market exists which means these borrowers end up paying 2-3 percentage points over the high street rate and are paying far more for their mortgage than they should, because of a small credit blip in the past.
Light adverse cases on the rise
Sadly it’s a catch22 situation for those with very light adverse credit as in addition to there not being many options in the mortgage market for these light adverse clients, on the flip side most high street banks will automatically dismiss such cases completely with the high street mostly rejecting any application with so much as a single late payment in the last 12 months.
David White, chief operations officer at Simply Lending, said it has seen a gradual rise in light arrears cases over the last decade.
“The main difference is that 10 years ago you’d see heavier adverse such as bankruptcy, lots of defaults and big CCJs,” he said.
He added: “We have observed not only an increase in the number of enquiries from individuals with credit issues but also a broader range of issues, notably a rise in missed or late payments on credit cards, rather than more severe events like bankruptcy.
“This trend can likely be attributed to the ongoing cost-of-living crisis affecting many households. This does not necessarily stop people from obtaining a mortgage, but will often translate to a higher interest rate and higher monthly payment.”
Filling a market gap
While there is some 15 lenders whom offer products to the heavier adverse market, the light adverse borrowers could be better served and broker Tony Highman of AdverseOnline says that in addition to more lenders being needed, the near prime market needs innovation, something which his online bad credit mortgage tool hoped to offer.
Higham said; “What I have noticed in my time in the bad credit mortgage industry is that the old model of making an appointment to see a broker was still the most popular model and one that asks for a lot of time and inconvenience from the client, which is made worse if that client cant be helped. Thats why I created AdverseOnline, so that people with light or indeed heavy adverse credit can use our tool and see, without a credit search, if there is a bad credit mortgage product suitable to their needs. There’s no in-person appointments and the client can see if they are likely to get a mortgage and what the rate will be, before getting in touch.”
Near prime innovation needed
Ranald Mitchell, director at Charwin Mortgages, said: “The growing near prime category remains under-served by mainstream lenders, leaving borrowers reliant on second-tier lenders who are stepping in to fill the gap.
“With credit files now holding extensive information, finding an applicant with a spotless record is becoming increasingly rare. Even minor missteps on a digital profile can lead to significant increases in mortgage costs, raising questions about the fairness and accessibility of the market. It’s time for the industry to re-evaluate what it means to be prime in the modern lending landscape.”
Other Finance & Money News – Pepper Money Specialist Lending Study / Half of people with adverse credit say overall debt up in last year / UK Mortgage Lending to Fall Again in 2024 / Minimum Credit Score to Buy a House in the UK
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