|
Perfect solutions October 2004
Known
as sub-prime, there are mortgages available for those who do not
fit into many lenders’ strict criteria. Kathleen Hennessy
considers the options for those deemed to be not so perfect
These
days, getting on the property ladder can be tough: spiralling property
prices are placing much of the UK’s property market out of
the financial reach of the average buyer. But that’s not the
only obstacle. Lenders grant mortgages to borrowers they believe
will be able to repay their loans without significant difficulty.
One of the criteria they use for making this decision is the mortgage
applicant’s credit history – but if your credit history
is less than perfect, you’re likely to be classified as a
sub-prime borrower.
The sub-prime borrower
“Anybody could need a sub-prime loan,” explains
Matt Grayson, public relations manager at Birmingham Midshires,
the specialist lending arm of Halifax. “They’re just
loans for a customer with a particular set of needs. Lifestyles
in today’s society have changed the profile of the typical
sub-prime borrower – jobs for life are rare and people can
find themselves experiencing financial difficulty through no fault
of their own.”
This is especially true for anyone who suffers unemployment, divorce
or bankruptcy, any of which can severely disrupt your finances.
All a lender sees when it runs a credit check on you is that you
missed several previous mortgage or credit card payments, and this
could mean an immediate refusal of a loan.
Other problems for lenders include borrowers with no credit history
at all – perhaps because they’ve just moved out of home
or started a first job and had no previous access to credit –
and those with past convictions for bad debts. If you run up a debt
and someone takes you to court, you could end up with a county court
judgment (CCJ) made against you. CCJs are added to credit history
files and remain there for six years, even if the debt is repaid
during that period.
You might even find yourself with an impaired credit record despite
never having missed a payment or defaulted on a loan: credit files
can and do have errors on them, and before applying for a mortgage
it’s in your interests to check your file to ensure there’s
nothing there to scare off a lender .
Any of the above problems can paint a black cloud over a mortgage
application form, even if the rest of your circumstances seem a
perfect fit for a lender’s criteria. You could have past debts
but currently enjoy full-time, well-paid employment, for example.
“In fact it is pretty unreasonable to expect everyone to go
through life without experiencing scrapes and bumps,” adds
Grayson.
So it’s heartening to know there is now an entire section
of the mortgage market willing to consider mortgage applications
from would-be borrowers whose financial pasts are less than sterling.
The sub-prime mortgage
Sub-prime loans are structured the same as standard mortgages:
there is still a range of fixed and capped rates, for example. But
this is a recent development.
“Traditionally sub-prime customers would have had limited
options available,” says Grayson. “But the sub-prime
market has changed over the last five years or so and now there
is much more choice, fairness and transparency. Fixed rates and
choices between repayment and interest-only mortgages are all features
that can be commonly found in the sub-prime market. Mainstream values
have been brought to the market and the stigma of sub-prime borrowing
has been removed.”
In fact, the only area where borrowers will notice a major difference
is in the cost. “Sub-prime loans are typically more expensive
than standard mainstream mortgages,” says Grayson. “This
is down to the fact that sub-prime usually carries a slightly higher
risk to the lender.”
In other words, if a borrower has had financial difficulty before,
a lender will take the view that the same borrower might have problems
again – and the lender doesn’t want to be out of pocket
as a result. The bottom line is that sub-prime mortgages have higher
rates than standard loans.
The sub-prime market
Just because you’ve had financial difficulties in
the past, however, it doesn’t follow that you have to take
the first loan offered to you. The sub-prime mortgage market is
incredibly sophisticated: even mainstream, high-street lenders now
offer sub-prime loans, so there is still a great deal of choice.
“Specialist lenders typically cater for sub-prime loans due
to the higher risk they carry, but some high street names have specialist
divisions that provide sub-prime,” says Grayson. And, as he
points out, this can bring enormous peace of mind to borrowers wary
of getting into further financial difficulty by borrowing from unscrupulous
lenders with poor business practices.
“It’s also important not to take the first loan you
are offered,” advises Grayson. “An adverse credit rating
does not mean you cannot get a loan. There is so much choice out
there that there is no need to settle for expensive deals with large
penalties. There are many competitive rates and product types available
to suit the individual.”
Many sub-prime borrowers fall into the trap of being so grateful
for securing a loan at all that they don’t look at the implications
of the mortgage over the longer term.
“It’s important that you think further than the first
year of the loan – don’t be blinded by low upfront rates
which leave you tied into higher rates or huge early redemption
penalties later on,” warns Grayson. “Look at the whole
package – a good mortgage broker will be able to help you
with this.”
The sub-prime future
Obviously, with so much competition in the mortgage market,
borrowers are always keen to ensure they’ve got a good deal
– but if you’re a sub-prime borrower, do you have to
be stuck with higher rates forever? Not at all, says Grayson.
“As long as borrowers can prove they are reliable by keeping
up the mortgage repayments, they can build and repair their credit
history, making them more likely to get a mainstream loan,”
he explains. “One important step to remember is that there
is no need to take an overpriced option that could result in the
customer defaulting on repayments and ending up back at square one.
There are plenty of great deals out there that have many characteristics
of mainstream mortgages, and even some products that are stepped
to help people get back on their feet.”
PREVIOUS Complete guide to Homebuying FEATURES
|
PREVIOUS Complete guide to Homebuying FEATURES 
