"If a potential homeowner had no chance of securing a mortgage simply because they’d missed a mobile phone or utility payment a few years ago, then the market would be in a far worse position."
From one point of view, the ‘historical’ is the most important factor, in that you can get a good idea of a potential customer’s credit-worthiness by looking at how they have managed their finances in the past.
If there is an abundance of regular and substantial ‘red flags’ showing on a credit report then this customer grows in risk for a considerable number of lenders. They don’t fit the ‘vanilla’ bracket that these institutions want and they are unlikely to look positively at them, regardless of their more recent activity and record.
We fully understand such an approach – it’s a realistic one to take when you’re looking at a particularly chequered credit past. However, there’s also a strong argument to suggest that such an approach isn’t right in all circumstances; in other words, high-street operators tend to be ultra-cautious when it comes to any credit blips or adverse credit in a customer’s history.
They can treat an amber flag as they would do multiple red ones – in other words, the likelihood is that this particular borrower is not going to make it through the process with such a lender. And they do not factor in more recent activity – what does the credit report look like over the last 12-18 months, how many of those blips have been fully resolved and what was the timescale in dealing with them? Are they really larger-scale credit issues or are they just aberrations that many people pick up, often without actually knowing what has happened?
That’s why we believe it’s important that for, what we call, ‘mainstream misses’ there is a degree of flexibility around the deconstruction of a borrower’s credit report. Not all arrears and CCJs are the same, not all blips register in the same way, and if these truly are ‘historical’ issues then we much prefer to make our decisions about lending based on the ‘actual’.
It’s an approach which might not be favoured by the high-street operators but is certainly followed by the successful residential lending specialists. And if you look at the most recent overall data for mortgage borrowers getting into arrears, you can actually see that it tends to be rather successful at determining which borrowers are worth the risk, even if they do have those historical blips.
Recent data from UK Finance shows that homeowner mortgages in arrears remain at historically low levels – as at the end of Q3 last year only 0.79% of all residential mortgages outstanding were in arrears of 2.5% or more of the outstanding balance, a fall of 9% year-on-year. Now, there are many factors to this – employment and wage levels, borrowers prioritising the mortgage payment, lower rates – but one of those is also the measures lenders like Foundation have in place to onboard borrowers and to ensure that those with complex incomes or credit blips do not miss out on being able to secure a mortgage, even if they might not make the requirements of the mainstream high-street operators.
We shouldn’t underestimate the positive impact this can have – if a potential homeowner had no chance of securing a mortgage simply because they’d missed a mobile phone or utility payment a few years ago, then the market would be in a far worse position. These types of borrowers shouldn’t be penalised for credit issues in their past which they, quite rightly, would regard as ancient history and have no bearing on their ability to service a mortgage going forward.
That’s a very powerful message for advisers to be putting out into the market, that those borrowers in such a position do have options when it comes to buying or remortgaging; it’s just that the options are not going to be with the lenders/banks they walk past every day on the high-street.
There is currently a lot of talk about mortgage prisoners but what we don’t want to also do is create a picture whereby credit-worthy borrowers feel they are also imprisoned by their own past credit, when that’s clearly not the case. We certainly want to ensure that those who might not fit the mainstream criteria understand the mortgages they can secure and the quality advice they can get in order to take them to this place.
This is a market open for business with an appetite to lend to such ‘mainstream misses’ – credit history will determine a lot but with a fully-rounded look at what has happened more recently, we can ensure that those who should get a mortgage, do get one.
