Borrowers with a chequered credit history were never top of a mortgage lender’s favourites list, but the recession could leave them facing a 10-year sentence of being entirely ineligible for a home loan.
Last week, solicitor and repossession expert Moore Blatch warned that the 60,000 individuals it predicts will declare themselves bankrupt this year won’t qualify for another mortgage for at least a decade. This is because so-called sub-prime mortgages, once available for borrowers with bankruptcies on their credit records, have all but disappeared.
According to Trigold – a data provider used by brokers – the number of mortgages available for bankrupts has fallen by 96 per cent in the two years since the end of January 2007. And the remaining deals are too expensive to contemplate, says Paul Walshe, head of lending at Moore Blatch.
“People with a bankruptcy on their record who are granted a loan today are likely to pay an average of £100,000 more in mortgage interest – based on a £100,000 loan – compared to someone who has a good credit history,” he explains. His calculations are based on a 5 per cent disparity in rates between prime and sub-prime mortgages over 20 years, though he warns that the difference can be as much as 10 per cent.
But while some specialist lenders, such as iGroup and MBS Lending, still claim they will accept applicants with discharged bankruptcies (this usually happens within a year of a bankruptcy being declared), in practice not one lender would go through with it, says Ray Boulger, technical director at broker John Charcol. “In my view, the reduction in the number of mortgages for bankrupts is more like 100 per cent since January 2007. Virtually all specialist sub-prime lenders have disappeared.”
For example, the once heavy sub-prime lender Beacon Home Loans shut its doors to bankrupt borrowers last December. “We are now officially a prime lender, though we may lend to borrowers with very mild credit problems,” says sales director Clive Willson.
However, bankruptcy will tar an individual’s borrowing capacity for much longer than the six years in which the status shows up on their credit file (which starts ticking from the day bankruptcy is declared). “Even when it has fallen off your credit file, you will not have been able to borrow during this time and so your record will look very thin, which will immediately put off a mortgage lender,” says Mark Ward, head of consumer services at Callcredit, the credit reference agency.
“What a lender looks for is a credit history to show you are a reliable borrower. In this case, they won’t find it.”
Chris Tapp, director at debt charity Credit Action, adds: “Lenders could still ask you to declare any previous bankruptcies years after they are over.”
But, in times of recession, you don’t have to be bankrupt to face long-term problems in sourcing a mortgage. Having your home repossessed, perhaps because of missed mortgage repayments, is deemed almost as bad, says Mr Boulger. “A repossession shows you have defaulted on the single most important debt to a mortgage lender. It will only be regarded as marginally preferable to a total bankruptcy.”
According to recent figures from the Centre for Policy Studies, based on data from the Council of Mortgage Lenders and the Financial Services Authority, more than 145,000 households will have their homes repossessed during the recession.
Next on the list of “unmortgageables” are those borrowers who have taken the sweeter alternative to bankruptcy – individual voluntary arrangement (IVAs). These plans – which must be agreed by 75 per cent of creditors in terms of value, not number – still require a monthly payment over a five-year period, though debtors are permitted to stay in their home.
The clear bonus with an IVA is that in keeping the home, a borrower also retains their mortgage; providing the repayments are met, the lender must continue to honour it. But should they want to remortgage to a different lender, they would be met with the same cold shoulder, adds Mr Boulger.
And, in this delicate lending environment, the slightest blip is likely to disrupt a mortgage application. “Even forgetting to pay your mobile phone bill will register as a blot on your file,” says Melanie Bien, director at broker Savills Private Finance. “And because it is so easy to miss the odd payment, more borrowers find themselves in difficulty for relatively minor offences.”
Some lenders, such as GE Money and Platform, owned by Britannia building society, will still advance money when faced with minor credit offences. But you will need a minimum deposit of 25 per cent of the property value, as opposed to the 10 or even 5 per cent that used to be applied where applicants had lightly adverse credit records.
Even if your credit file is exemplary, you could find yourself among the growing number of people who are turned down for the home loan they need. “Self-certification mortgages [where you declare your own income, usually because you are self-employed] have disappeared, while first-time buyers who do not have a sufficient deposit will also find they won’t be able to borrow,” says Mr Boulger. “This will account for around 20 per cent of would-be property buyers this year.”
Even lenders that declare they advance cash to applicants with deposits of 10 per cent are failing more people on the basis of credit scores than they are at 25 per cent, adds Ms Bien. “This suggests that there is actually just little appetite to lend at this level.”
But of all the types of borrower who are waiting for the mortgage market to return to its former flexibility, those with chequered credit histories will have to wait longest. “Sub-prime mortgages will undoubtedly be the last to return to the market. In the meantime, the only option is to rent or live with parents,” says Mr Boulger, “Even if you are buying with a partner who has a clean credit history, your name will not be accepted on the mortgage agreement, and if you are married or have joint finances it could even affect a partner’s sole application.”
That’s why Moore Blatch urges people who have any, even slim, alternative to bankruptcy to take it. “Do not consider writing off debts as an easy solution,” says Mr Walshe. “While the legal basis for bankruptcy is to allow for a clean start, the reality is you could pay more for years to come.”Reuse content