As many as one in three homebuyers faces having their application turned down for a mortgage by mainstream lenders, according to industry experts. And failing a mortgage lender's strict criteria can force home buyers to turn to specialist, "sub prime" lenders in order to organise a home loan.
These mortgages are more expensive than standard mortgages, often significantly more so. Estimates for the exact size of the sub-prime market vary, but range between six per cent and 30 per cent, according to the Norwich and Peterborough building society. One fact is certain: the market is growing.
Figures from the Council of Mortgage Lenders show that the number of home owners with between three and six months of arrears rose from 53,960 in the second half of 2004 to 57,220 in the first half of this year. Higher interest rates - with Bank of England base rates at 4.75 per cent for a year - will have increased the number of home owners facing difficulties. High levels of personal borrowing also means that more homebuyers might have problems in their credit history, or even county court judgements against them.
For their part lenders, faced with stiff competition in the mainstream market, are looking to sub-prime lending to bolster business. This is in turn encouraging people who want to buy, but who would otherwise be deterred by their poor credit histories or the prospects of high interest rates, to step on to the property ladder.
The Norwich and Peterborough is one of a number of lenders, especially building societies, to move into the credit-impaired mortgage business. The society recently launched what it terms a "light adverse" home loan range. This, according to Gary Lacey, group product manager, is aimed at home buyers with credit problems in the past.
"This is aimed at people recovering from bad debt: we have fairly restrictive criteria in terms of the county court judgements we will allow or the number of months' mortgage arrears," says Lacey. "We won't look at people who are bankrupt." The society, he says, is looking for buyers who are taking proactive measures to improve their position.
While this might appear inflexible, it does put buyers in a better position than before. Previously, home buyers with credit history problems would have been turned away, and would have needed to borrow at higher rates from a specialist sub-prime lender.
Building societies such as the Cheshire and Stroud and Swindon are others that have recently entered the sub-prime lending market - a move made easier by technology that allows lenders to take a more sophisticated view of a client's true credit worthiness.
Such loans do still come at a price, however. The Norwich and Peterborough's two-year fixed rate mortgage comes in at 6.74 per cent. This compares to the society's best rate, for regular borrowers, of 4.89 per cent. The lender also offers a loan with a 1.65 per cent discount, for one year, on its standard variable rate, although the loan has redemption penalties for three years. The current market-leading two year fixed rate, according to Moneyfacts, is 4.15 per cent from the West Bromwich building society.
Borrowers with moderate credit history problems may have to pay at least one per cent over standard rates, according to David Hollingworth, at mortgage advisers London & Country. But sometimes, lenders will accept someone with limited credit problems on their standard terms, saving significant amounts of money for the borrower.
But he cautions that it is not easy to predict whether a lender will take on a particular borrower on standard terms. "It is a funny area. It is not possible to say that one particular person will be OK with a mainstream lender, and another will have to go to the sub-prime market," he says.
Hollingworth points out that as a broker, he will try mainstream lenders first, before widening the search. And it may well be borrowers themselves who think they are in the sub-prime bracket when in practice, they can find a mortgage on standard terms. "Sometimes clients assume that, because they have had credit problems, they are heading for the sub-prime market," he says. "We always start with prime rates."Reuse content