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Mortgage solutions for clients with credit issues

Ashley Pearson, National BDM at The Loughborough for Intermediaries

In the current economic climate of higher interest rates and rising living costs, dealing with clients with credit issues such as arrears, defaults, adverse credit or even CCJs, is becoming increasingly commonplace.

Household budgets are starting to feel the effect of rising living costs as the shift from a historically low interest rate environment, to one that saw the base rate increase 15 times to 5.25% in August 2023, begins to take hold.

The impact of this change on consumer finances has been significant. Figures from the FCA show the number of people struggling to meet bills and credit repayments rose by 3.1 million in the year to May 2023, while the number of people who missed a bill or loan payment has also gone up by 1.4 million in that time.

The growth in the number of consumers encountering some form of financial difficulty means the chances of mortgage brokers handling a query from a client with credit issues is now somewhat inevitable, so understanding the options available to them is imperative.

There are a number of reasons why your client may have an impaired credit history. Perhaps they missed a payment due to a simple oversight such as moving house or changing jobs, or maybe they experienced more significant financial challenges which resulted in an IVA or CCJ.

Either way, a credit blip doesn’t necessarily mean the client is no longer credit worthy, so it’s important that brokers work with their clients and specialist lenders to understand the life events surrounding the default so that they can find a suitable solution for their clients’ needs.

Loughborough Building Society for example, offers a Prime Plus range of mortgage products on a fixed rate, shared ownership, buy-to-let and borrowing into retirement basis, all of which are aimed specifically at borrowers with a history of impaired credit.

Customers with arrears over two months, or any default, in the last two years as well as those with no more than three CCJs not exceeding a combined maximum of £1,000 are eligible to apply, as are those who have been subjected to an IVA or DMP within the last three years.

Those who have been discharged from bankruptcy or repossession for more than three years or those that have had three or more payday loans in the last 12 months would also be considered provided a full explanation for the credit issues experienced by the customer is outlined in all applications.

Recently, we received an application from a client with an IVA who was looking to remortgage and take on some additional borrowing for home improvements but was unable to secure a new interest rate with their current lender.

The client entered the IVA as a consequence of Covid as he was self-employed with his own building company but couldn’t access properties to do the work due to government enforced lockdowns.

As a consequence, he suffered a huge loss of earnings, which had an impact on his ability to meet repayments on some unsecured debt. He has subsequently left the industry and retrained as a health and safety officer and is now in full time employment in the rail industry.

As this was the first time the client had ever had a credit issue, had maintained all his IVA payments over the last two years and had not taken on any additional borrowing, we, as a lender, were comfortable to lend to the client and he secured a mortgage with a lower rate of interest. He was also able to complete essential home improvements on his property.

In this case, identifying the reasons for the credit issue was crucial in determining the client’s borrowing suitability. While credit related issues are not always an easy conversation for brokers to have with their clients, understanding life events and determining the reasons behind any financial difficulties could prove critical in helping your client get back on track.

For those brokers unsure of how best to approach these situations, or are unclear about the solutions that may be available for their client, enlisting the help of a specialist lender familiar with this area of the market should be a top priority.