Sssh, say it quietly...but sub-prime lending might be coming back

High-street giants now cherry pick borrowers, leaving their respectable rejects to new, smaller lenders

Sub-prime is a dirty word in the mortgage market in the wake of the credit crunch, but with the big lenders ignoring all but the perfect borrowers, many creditworthy homeowners risk being unfairly labelled and unable to get finance.

Borrowers with irregular incomes, or imperfect credit ratings, with any history of missed credit payments, are being ignored by the bulk of the high-street lenders.

This comes at a time when things are already tough, with the number of mortgages written last month by the six largest high-street lenders 26 per cent lower than a year before, according to the latest figures from the British Bankers' Association (BBA).

In general terms, sub-prime lending refers to high-risk borrowers with unfavourable credit histories, often because of county-court judgments (CCJs), Individual Voluntary Arrangements (IVAs), bankruptcy, or arrears on a mortgage or any other defaults on credit commitments. When the credit crunch hit, lenders took swift action to limit the mortgages available by dropping loan-to-value ratios (LTVs) and tweaking credit scoring systems to control the number and quality of borrowers accepted.

"Sub-prime was seen as one of the main causes of the credit crisis and, as the riskiest type of lending, it was one of the first markets to disappear. The last sub-prime deal was withdrawn on 27 May 2009," says Michelle Slade, from financial comparison site Moneyfacts.co.uk.

As a result, lenders are employing tougher criteria to determine how risky a borrower is, and although many lenders would have once forgiven a few blemishes on a credit record, now only pristine borrowers are getting the best rates. Combine that with a record low number of mortgages being written last month and the possible threat of a double-dip recession, and some borrowers who would have been considered prime a few years ago, are now finding they are being rejected by the mainstream market.

"In most instances those that now find themselves as sub-prime due to criteria changes, or those that are coming to the end of an old sub-prime deal, have little option but to remain on their existing lenders' revert rates until their credit scores improve and they can re-enter the market as mainstream borrowers," says Ms Slade.

With big players such as Santander, HSBC and Nationwide dominating the residential sector but competing for the same "perfect" borrowers, the fear for many homeowners is that they are being unfairly left out. But one ray of hope is that, because the high-street banks are cherry-picking the safest borrowers, this has left a gap for smaller lenders entering the market to concentrate on those who just miss out.

This week, specialist lender Precise Mortgages gained approval from the Financial Services Authority (FSA) to provide residential mortgage finance. At present, the group only lends to buy-to-let investors, a sector not regulated by the FSA, but it will launch a series of mortgage products to homeowners from November and, crucially, the lender has said it will focus on borrowers who do not meet the strict criteria of the main high-street banks.

"We are seeing some lenders, like Kensington, Aldermore, GE, Platform and now Precise Mortgages, that aim to offer something a little outside the standard lenders' criteria, although it's a far cry from the traditional definition of sub-prime," says David Hollingworth of mortgage broker London & Country.

Specialist lenders could be the only option for those who don't fit the "perfect prime customer" bill of being a salaried employee with one income, living at the same address for at least three years and maintaining every payment on every credit commitment.

"Conditions are likely to be difficult for some years. Until funding returns to the market, lenders are likely to shun those with credit problems, and even those with just a missed mobile phone payment will struggle to get funding," says Melanie Bien of mortgage broker Private Finance.

Where specialist lenders can step in, is for those who fall just outside of this strict definition, such as the self employed, those working to a commission or bonuses, or those with an incomplete credit history, but who can still prove themselves to be responsible, creditworthy individuals.

The benefit of specialists is that they are more likely to take homeowners on a case-by-case basis. So, although having a record of arrears will mean automatic rejection from big lenders, smaller specialist lenders will use underwriters who can take other factors into consideration.

Platform allows up to £500 CCJ (although none in the past 12 months) with its Almost Prime range, and Kensington will accept missed payments up to two minor defaults in the past two years as long as the borrower has been up to date in the past six months. "The main difference between Kensington and the high-street banks is that we view each case on its merits instead of using credit scoring where each application is attributed a score in terms of risk profile, and if you're above that score you pass, or below and you fail," says Alex Hammond of Kensington Mortgages.

The big question, however, is whether borrowers will have to pay through the nose for this.

Aldermore is one new entrant into the market this year that has made a point of offering mortgages to borrowers rejected by mainstream lenders. Its residential range includes a two-year tracker at 3.98 per cent for 65 per cent LTV, and a three-year fix at 5.28 per cent for 75 per cent LTV.

When compared with the best of mainstream offerings such as First Direct's two-year tracker at 2.19 per cent for up to 65 per cent LTV, with a £99 fee, or the three-year fix at 3.49 per cent for those with at least 25 per cent deposit from Mansfield Building Society, with a £999 fee, it's clear that there is a premium to pay.

At Kensington, residential mortgages have recently been cut and now start from 4.7 per cent for a two-year fix up to 75 per cent LTV, and 5.44 per cent for up to 80 per cent LTV. Again, there are much better deals in the mainstream market, such as the 2.89 per cent two-year fix from Yorkshire BS, available up to 75 per cent LTV, with a £495 fee, or the Post Office's 3.45 two-year fix available to those with a 20 per cent deposit, which levies a £995 fee.

The only other option for borrowers struggling to get finance is to hold tight and try to improve their creditworthiness before applying again.

"The key is repairing the credit profile by getting up to date and building a good track record for future mortgage applications," says Mr Hollingworth. "As for all borrowers, having as big a deposit as possible will help."

Expert View

David Hollingworth, London & Country

"In the short to medium term, the focus from most lenders will be on low-risk, plain-vanilla lending. Beyond that, the new lenders that are entering the market should bring some new approaches to niches that fall just outside although are very much at the prime end of the market."

News
The Banksy image in Folkestone before it was vandalised
people
Life and Style
tech

Sales of the tablet are set to fall again, say analysts

Sport
football West Brom vs Man Utd match report: Blind grabs point, but away form a problem for Van Gaal
Arts and Entertainment
Gotham is coming to UK shores this autumn
tvGotham, episode 2, review
PROMOTED VIDEO
News
i100
Arts and Entertainment
Bloom Time: Mira Sorvino
tvMira Sorvino on leaving movie roles for 'The Intruders'
News
Brian Harvey turned up at Downing Street today demanding to speak to the Prime Minister
news

Met Police confirm there was a 'minor disturbance' and that no-one was arrested

Arts and Entertainment
George Lucas poses with a group of Star Wars-inspired Disney characters at Disney's Hollywood Studios in 2010
films

George Lucas criticises the major Hollywood film studios

Voices
Chris Grayling, Justice Secretary: 'There are pressures which we are facing but there is not a crisis'
voices

Does Chris Grayling realise what a vague concept he is dealing with?

Life and Style
A street vendor in Mexico City sells Dorilocos, which are topped with carrot, jimaca, cucumber, peanuts, pork rinds, spices and hot sauce
food + drink

Trend which requires crisps, a fork and a strong stomach is sweeping Mexico's streets

Life and Style
The charity Sands reports that 11 babies are stillborn everyday in the UK
lifeEleven babies are stillborn every day in the UK, yet no one speaks about this silent tragedy
News
Blackpool is expected to become one of the first places to introduce the Government’s controversial new Public Space Protection Orders (PSPOs)
news

Parties threaten resort's image as a family destination

Life and Style
Northern soul mecca the Wigan Casino
fashionGone are the punks, casuals, new romantics, ravers, skaters, crusties. Now all kids look the same
Life and Style
gaming

I Am Bread could actually be a challenging and nuanced title

News
Nigel Farage has backed DJ Mike Read's new Ukip song
i100
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Customer Service Executive / Inbound Customer Service Agent

    £18 - 23k + Benefits: Guru Careers: We are seeking a Customer Service Executiv...

    ASP.NET Web Developer / .NET Developer

    £60 - 65k + Benefits: Guru Careers: We are seeking a ASP.NET Web Developer / ....

    Operational Risk Manager - Asset Management

    £60,000 - £80,000: Saxton Leigh: Our client is an leading Asset Manager based...

    Project Coordinator - 12 month contract

    £27000 - £32000 Per Annum: Clearwater People Solutions Ltd: Our large charity ...

    Day In a Page

    Oscar Pistorius sentencing: The athlete's wealth and notoriety have provoked a long overdue debate on South African prisons

    'They poured water on, then electrified me...'

    If Oscar Pistorius is sent to jail, his experience will not be that of other inmates
    James Wharton: The former Guard now fighting discrimination against gay soldiers

    The former Guard now fighting discrimination against gay soldiers

    Life after the Army has brought new battles for the LGBT activist James Wharton
    Ebola in the US: Panic over the virus threatens to infect President Obama's midterms

    Panic over Ebola threatens to infect the midterms

    Just one person has died, yet November's elections may be affected by what Republicans call 'Obama's Katrina', says Rupert Cornwell
    Premier League coaches join the RSC to swap the tricks of their trades

    Darling, you were fabulous! But offside...

    Premier League coaches are joining the RSC to learn acting skills, and in turn they will teach its actors to play football. Nick Clark finds out why
    How to dress with authority: Kirsty Wark and Camila Batmanghelidjh discuss the changing role of fashion in women's workwear

    How to dress with authority

    Kirsty Wark and Camila Batmanghelidjh discuss the changing role of fashion in women's workwear
    New book on Joy Division's Ian Curtis sheds new light on the life of the late singer

    New book on Ian Curtis sheds fresh light on the life of the late singer

    'Joy Division were making art... Ian was for real' says author Jon Savage
    Sean Harris: A rare interview with British acting's secret weapon

    Sean Harris: A rare interview with British acting's secret weapon

    The Bafta-winner talks Hollywood, being branded a psycho, and how Barbra Streisand is his true inspiration
    Tim Minchin, interview: The musician, comedian and world's favourite ginger is on scorching form

    Tim Minchin interview

    For a no-holds-barred comedian who is scathing about woolly thinking and oppressive religiosity, he is surprisingly gentle in person
    Boris Johnson's boozing won't win the puritan vote

    Boris's boozing won't win the puritan vote

    Many of us Brits still disapprove of conspicuous consumption – it's the way we were raised, says DJ Taylor
    Ash frontman Tim Wheeler reveals how he came to terms with his father's dementia

    Tim Wheeler: Alzheimer's, memories and my dad

    Wheeler's dad suffered from Alzheimer's for three years. When he died, there was only one way the Ash frontman knew how to respond: with a heartfelt solo album
    Hugh Bonneville & Peter James: 'Peter loves his classic cars; I've always pootled along fine with a Mini Metro. I think I lack his panache'

    How We Met: Hugh Bonneville & Peter James

    'Peter loves his classic cars; I've always pootled along fine with a Mini Metro. I think I lack his panache'
    Bill Granger recipes: Our chef's heavenly crab dishes don't need hours of preparation

    Bill Granger's heavenly crab recipes

    Scared off by the strain of shelling a crab? Let a fishmonger do the hard work so you can focus on getting the flavours right
    Radamel Falcao: How faith and love drive the Colombian to glory

    Radamel Falcao: How faith and love drive the Colombian to glory

    After a remarkable conversion from reckless defender to prolific striker, Monaco's ace says he wants to make his loan deal at Old Trafford permanent
    Terry Venables: Premier League managers must not be allowed to dictate who plays and who does not play for England

    Terry Venables column

    Premier League managers must not be allowed to dictate who plays and who does not play for England
    The Inside Word: Brendan Rodgers looks to the future while Roy Hodgson is ghost of seasons past

    Michael Calvin's Inside Word

    Brendan Rodgers looks to the future while Roy Hodgson is ghost of seasons past