Finance: There's a loan for everybody

A poor credit history need not spoil your future. Stephen Pritchard sifts the options

The UK is now the most indebted country in Western Europe. According to figures from Datamonitor, a market research firm, Britons borrowed £215bn last year.

The rise has been fuelled, in part, by competition between mortgage companies and other lenders. One of the fastest-growing areas of mortgage lending is the so-called "sub-prime" market - mortgages for people with poor credit history or other circumstances that, from a bank's point of view, are less than ideal.

Also, higher levels of borrowing have increased the number of people who fall into mortgage arrears or suffer other credit problems. In turn, this has increased the market for sub-prime mortgages.

Last week, the Financial Services Authority warned companies operating in the sub-prime market that it was monitoring the sector closely, following an investigation into poor-quality advertising and marketing put out by a number of mortgage brokers. The FSA found that brokers with poor-quality advertising also often gave misleading information about fees.

The authority found that some people were being sold more expensive mortgages when there was no evidence that they had impaired credit. Interest rates and fees on sub-prime mortgages are generally higher than the norm. Sub-prime brokers can also charge 2 and 3 per cent of the mortgage amount for their services.

Why should I look for a sub-prime mortgage?

One of the main reasons homebuyers look for a sub-prime mortgage is because they have been turned down by a bank or building society. According to research by the Joseph Rowntree Foundation, rejection also makes borrowers more likely to go to a mortgage broker as they are wary of being turned down again.

Some homebuyers will have a clear idea of their credit status. In other cases, rejection could be for a number of reasons, such as a poor credit score or insufficient proof of income.

If someone is turned down by a high-street lender, they should try to find out why. Homebuyers should not fall into the trap of assuming that if one bank or building society rejects them, they automatically fall into the sub-prime category. It could well be that applying to a different lender could bring success.

Alternatively, homebuyers could turn to a mortgage broker. Again, being turned down on the high street does not mean it is necessary to go to a specialist sub-prime mortgage broker. A good broker can look at both mainstream and specialist lenders. If a buyer has minor credit problems, it should be possible to find a mortgage at a standard rate.

"The first question in any situation is whether the client can be placed with a mainstream rate. This will depend on the extent of the credit problems they have encountered in the past," says David Hollingworth, director at mortgage broker London & Country. "If the credit problem was settled some time ago and the borrower has a good track record since, a mainstream lender may be able to help."

What should I do if I am considered sub-prime?

Sit down with an adviser rather than try to find a mortgage over the internet - and risk a string of rejections. Clare Mortimer, of specialist lender and HBOS subsidiary BM Solutions, says that a branch adviser at Halifax could look at a homebuyer's case and, if it fails the criteria, recommend another lender within the group. "HBOS has several brands and so can offer mortgages to a wide range of borrowers," she says. " If a client is unable to secure a mainstream mortgage with the Halifax, they can access products from the BM Solutions brand which offers deals from 'near prime' status."

Anyone with credit problems need not assume that they will always have to borrow in the sub-prime market. Several lenders, including BM Solutions, Accord and Scarborough Building Society offer "credit repair" arrangements.

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