City boys and girls who have been a bit too flash with the cash in the past no longer need to feel excluded from the property party. Gone are the days when over-extended credit cards or unpaid bills let alone County Court Judgements and insolvencies would stop mortgage companies from offering buyers a loan. Today you may well be charged a premium interest rate if your financial past has been a little rocky. But experts say that very few people will end up being refused a mortgage altogether.
The problem, though, is knowing where to look for a loan. Most high street banks and building societies will lend to people they categorise as being in the ‘sub-prime’ market. But many will only do so via differently-named subsidiary companies that deal by phone or via brokers.
The lenders say it’s best to take the broker-only approach to deal with non-standard customers because the more complex nature of the market means borrowers need well-trained, independent professionals to talk them through the loan choices. And good advice is important as the number of loan choices explodes.
Five years ago industry guides such as Moneyfacts had only a handful of pages of loan choices for sub-prime borrowers. Today they have several dozen pages with traditionally cautious lenders from Alliance & Leicester to Norwich & Peterborough recent entrants to the market. The newer players are particularly aware that divorce or relationship breakdown can trigger one-off financial problems that shouldn’t penalise people who want to re-enter the mortgage market.
Getting to grips with the offerings and finding the right deal means learning a whole new set of jargon, however. Sub-prime is only the half of it – depending on whether you have CCJ’s, mortgage arrears, bankruptcies or various other outstanding or cleared debts you will be categorised as anything from ‘almost prime’ to ‘heavy averse’. Some lenders even colour code the degree of past financial problems from green to red when working out who can be offered what. The interest rate you pay and the amount you will be allowed to borrow will vary according to the label the lender attaches to your individual circumstances.
With Britannia building society’s specialist offshoot Platform, for example, two year fixed rates for those with the worst credit records are normally some 1.3 per cent higher than for those with more minor, and older, financial problems. The good news is that the rates at the lower end of the lender’s sub-prime scale can be little more than 0.5 per cent above those charged to problem-free borrowers through its branches.
A potential pitfall for all sub-prime borrowers is that an above average interest rate isn’t the only financial penalty they face. Fall into the sub-prime market and you can suffer a double whammy whereby many lenders won’t deal with you unless you approach them through a broker, and many brokers charge hefty fees for their services. Up to 3 per cent of the loan amount is common – with VAT that works out as more than £5,000 on a typical London mortgage of £150,000.
Some brokers charge far less – London & Country Mortgages in Bath actually operates on a no-fee basis while Purely Mortgages in Whiteley, Hampshire has a fixed fee of £995 for non-standard mortgage work.
Whichever type of sub-prime loan you end up with it is vital to prepare to move back into the mainstream market as soon as possible. If you keep a clean record on your new loan you effectively ‘rebuild’ your credit rating and can then re-mortgage on to any loan choice from any lender. A good broker should keep you informed about how long the rebuilding process is likely to take and when you can switch deals without any exit penalties. London & Country says three years of clean mortgage repayment history is normally enough to allow people to re-mortgage on to a lower, mainstream deal. So you should be wary of any sub-prime deal that ties you to your lender with big redemption penalties for longer than this timescale. ‘Our view is that sub-prime deals are stepping stones and we want people to use them to get back to an ordinary, low cost mortgage as quickly as possible,’ says the company’s David Hollingworth. ‘Our overall message is always that you shouldn’t feel you can’t get a mortgage because you have fallen into arrears or have had financial difficulties in the past. But neither should you have to pay too high a price in terms or interest rates or fees.’
BY NEIL SIMPSON
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