The adverse credit landscape and what it means for consumers

The current climate

The financial fallout from the pandemic has been significant and in many ways we are still picking up the pieces while grappling with the long-term effects. On top of this, consumers are now facing another financial upheaval. The cost of living is rising at unprecedented levels, with rising energy bills, fuel prices, and inflation showing no signs of abating. In fact, some are forecasting inflation to rise as high at 22% next year if gas prices remain as high as they are now.

The sad reality is that most people will have - and potentially continue to be - financially impacted in one way or another. While the pandemic was a mixed bag, with some able to save more due to a reduction in discretionary spending, the cost of living is set to impact everyone as the cost of goods and services rise.

The cumulative effect of all these factors is a growth in the number of individuals and families across the UK who find themselves in a precarious financial position, whether exacerbated by the pandemic or subsequent cost of living crisis. It is therefore important to understand how this current environment is taking its toll on consumer finances.

Impact on consumer finances

Crucially, a person’s financial history affects their financial future and with such extreme events as the pandemic and cost of living crisis, consumers, lenders, and brokers are each being placed in extraordinary positions when it comes to managing or assessing a person’s finances. Consumers, for example, are increasingly at risk of becoming more vulnerable and potentially experiencing a type of adverse credit whether it be through missed payments, using schemes such as buy now pay later, or taking on personal loans to help manage debt or rising living costs. Lenders, whether high-street or specialist, are being faced with the challenge of more customers having a form of adverse credit on their books, whereas brokers are being challenged with finding specialist lenders who can offer products to customers who don’t necessarily ‘fit the mould’ and need more support to get a mortgage.

Our research found that 3.2 million adults missed some form of major payment during the pandemic. This equates to 6% of people who missed their usual payments, including on major expenses such as their rent, mortgage, or credit cards.

Four in 100 adults admitted to having missed multiple payments, representing a significant proportion of the population who’ve been financially squeezed throughout the pandemic and who may have fallen into adverse credit. And with cost of living rising at the pace it currently is, this number may very well go up as people struggle to afford their monthly bills and expenses.

Across all adults who admitted to missing a payment, the average number of payments missed was three, with almost a third (31%) missing five or more.

Looking at what bills had been missed, the majority had missed a credit card payment, at 45% of all missed payments. Other payments people identified that they’d missed included:

• 40% missed a utility bill payment
• 27% missed paying their council tax
• 25% missed their rent payments
• 23% missed personal loan repayments
• 7% missed mortgage repayments

Furthermore, the scale of debt that has amounted over the past year for UK households has also increased. This has brought on additional consequences for consumers and 8% of UK adults revealed they have been issued with a County Court Judgement (CCJ) for debt, meaning that the court has taken action against people who have not responded to the debts they owe, amounting to 4.2 million people in total. Alarmingly, this figure rises to 11% of those who are planning to buy a property in the next year, but for lenders this is a significant red flag.

What is the impact on mortgage applications?

Missed payments can have a big implication on a person’s access to credit in the future, including large loans like a mortgage. It’s therefore concerning that prospective homebuyers are more likely to have accrued adverse credit, with a tenth (10%) admitting to having missed one or more payments between the pandemic years of 2019 and 2021, putting them at risk of having a mortgage application rejected.

For those individuals who missed a payment and are now looking to remortgage, they could face additional difficulties, with the potential to fall onto their lender’s standard variable rate (SVR), which is a particular concern as interest rates are also on an upward trajectory to combat rising inflation.

In addition, our research found that 10% of Britons say their credit score worsened since the pandemic. One in ten also said that poor credit scores have deterred them from applying for a mortgage altogether. This nervousness is perhaps understandable when presented with the fact that 12% of people who applied for a mortgage in the UK were denied. While an adverse credit incident can have future implications when it comes to mortgage applications, it doesn’t always mean that prospective homeowners are automatically excluded from accessing a mortgage. There are specialist lenders that will take a more comprehensive and bespoke approach to lending and will consider those who have a blips in their credit history.

How can the industry support those with adverse credit?

High-street banks have relatively inflexible criteria for who they will lend to. Applicants who don’t fit ‘the mould‘ will likely have their mortgage application rejected. This is because the majority of mortgage decisions are automated at the high street banks, and therefore there is no capacity to consider in the round the complexities of a person’s financial history.

Brokers have an important role to play in supporting customers in accessing the best deals for them. Though, with so many lenders in the market it can be difficult for brokers, particularly non-specialist ones, to know exactly how best to put forward their case for specific borrowers. Some lenders will have different criteria or asks, and while the facts are the facts, the way an application is presented can hold some sway. More education from lenders on what they are looking for could support brokers in putting successful applications together.

Equally, if a lender denies an application should they have a responsibility to advise the customer to seek independent advice in order to find a more suitable mortgage product?

For many, owning a home is a life goal and understandably it can be disheartening to be told a blanket ‘no’ when applying for a mortgage. Additional support from lenders to both the broker and consumer communities will hopefully mean they do not just give up on the mortgage process because of hiccups in credit histories, but to seek out more suitable options.