Mortgage market opens up to ‘bad credit’ homebuyers
Updated 17 March 2021
5min read
The disruption of the pandemic may have had one positive side-effect for homebuyers who have struggled to get a mortgage. With so many now facing financial uncertainties, lenders are having to be more flexible – and ‘complex credit mortgages’ could be on the rise. Article by Nick Green.
Obtaining a mortgage with less-than-brilliant credit is at last getting easier, and the trend may be accelerating, according to leading figures in the mortgage industry. Borrowers with lower credit scores, smaller deposits, irregular hours or higher proportions of non-salary income (such as bonuses) should start to see a greater number of deals becoming available to them – provided they are willing to shop around and search the whole of the market. What are known in the industry as ‘complex credit mortgages’ – to distinguish them from those offered to borrowers with highly dependable incomes – are predicted to become far more commonplace in 2021.
This is one of the unpredictable, even paradoxical side-effects of the Covid pandemic and its economic fallout. With so many businesses struggling or mothballed, so many employees furloughed on reduced income, and so much economic uncertainty still looming, we might have expected lending criteria to become even more draconian, as it did following the 2008 financial crisis. Instead, it looks as if the opposite may be more likely. The government has made it clear that it will fight tooth and nail to keep the housing market buoyant and prevent a crash in house prices – its actions since March 2020 have included re-opening the property market while most of the country stayed in lockdown, introducing a stamp duty holiday (and then extending it), introducing mortgage holidays, and most recently, offering guarantees on mortgages of 95%.
Similarly, lenders would much rather not be witness to another property crash, as their business depends on an optimistic market with a steady stream of buyers. Traditionally they would rather lend to buyers with rock-solid credit and income they could set their watches by – the problem is, such individuals are suddenly a lot harder to find, and may even now be in the minority. The economic effects of the pandemic have been indiscriminate, and suddenly millions more borrowers (or would-be borrowers) find themselves in the category of ‘complex credit’. So banks and building societies face a stark choice: severely whittle down their market to the lucky few with unaffected incomes (at the risk of the housing market rusting to a halt) – or loosen up their criteria to cater for the ‘new normal’. Early indications are that they are leaning towards this second option.
Lending rules relaxed
One factor that may change is the length of time a borrower needs to demonstrate that they have been in a ‘financially secure position’. Currently, borrowers need to be able to show at least 12 months of financial stability before a lender will consider them. For obvious reasons, this measure may have to be revised in the wake of the pandemic, since so many will have experienced a turbulent 12 months (or more) yet may by that time have a much more reliable income and better prospects ahead.
The traditional mechanisms for assessing credit scores will also need a rethink. According to Citizens Advice, some six million people have struggled with their mortgage repayments as a direct result of the pandemic, and many of these will have taken advantage of the mortgage payment holidays on offer. It’s likely therefore that both lenders and credit ratings agencies will adapt their policies to reflect this, as 2020/21 has been (hopefully) such an unrepresentative year in terms of assessing a person’s lending risk over the coming 25 years. Lenders are therefore likely to expand their ‘complex credit’ lending activities, which should in turn benefit those who have traditionally…
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