Are we set for an impaired credit avalanche when it comes to Mortgages?

    Paul Huxter - Head of Intermediary & Distribution 

It's been well-documented that the UK economy has faced many challenges over the past twenty-four months, as many experience a cost-of-living crisis. 

Whether this is due to the higher Bank of England base rate, impacting cost of lending, inflationary pressures or higher than expected unemployment levels that were initially projected by the UK government for Q2 2024.

The market is still experiencing homeowners coming off fixed-rated mortgages fixed at a time when the BoE base rate was 2.25%. It's essential that around 1.5 million homeowners fixed-rate mortgage deals will end in 2024.  Additionally, the BoE estimates that five million homeowners will see their monthly mortgage payments rise between now and 2026.

In addition, we are also witnessing higher household cuts, which are having a negative impact on the ability to pay bills. It was reported that in one month, an estimated 8.1% of mortgage holders missed essential payments such as housing, utility bills, credit cards, or loan payments.

While missing a single payment may partly be due to error or forgetfulness, there is a danger that mortgage holders may swiftly find themselves overwhelmed.

Future borrowing for individuals who miss payments may struggle, and those looking to upsize may find themselves limited in options, with house prices remaining static. This may result in little to-no equity being available, thereby necessitating a greater amount of personal funds required to facilitate future purchases.

To give an indication of this trend, annual average UK house prices according to government statistics  from 2021 to 2024, were £275,000, £294,000, £285,000, and £282,000. A reported 1.6 million existing borrowers have a reasonably cheap fixed-rate deal expiring in 2024. Without the ability to refinance to a comparative rate, we may see more borrowers missing payments.

With the likelihood of an increasing number of borrowers with impaired credit, and mainstream lenders with reduced appetite for this need, will we see a greater reliance on specialist lenders?

"Yes" to Impaired credit.

Lenders like West One try to work alongside clients to find a solution with a broad product range and criteria built on 'real-life'.

Lenders need to adapt to the needs of the market to support borrowers. West One's approach to credit issues, even those related to mortgage payments, takes into account the many financial  hardships faced by borrowers.

• Satisfied defaults & CCJ's ignored (except Higher LTV products)
• Unsatisfied defaults & CCJ's for no more than £500 each ignored (except Higher LTV products)
• Utility & comms accounts ignored even if defaulted (all products)
• Unsatisfied defaults & CCJ's of more than £500 each accepted
• Mortgage arrears accepted, even if within last 12 months
• Missed/late unsecured credit payments accepted

Impaired credit does not need to be an obstacle to homeownership, there are lenders who can provide flexible criteria.

No credit scoring, but not an impaired credit lender

The West One Residential Mortgage proposition operates a model of no credit scoring, no algorithms, and only a soft footprint at the decision in Principle stage.

The manual approach to underwriting and a dedicated case manager means the West One team commit their time to supporting the broker to progress the case, providing continuity and consistency with a case manager you can speak with to provide solutions.

It's important to remember that lenders who don't credit score don't necessarily mean they are an impaired credit lender. Impaired credit lenders may offer smaller loan amounts, with higher interest rates, due to increased perceived risk.

The reason there is no credit scoring is because it gives West One the ability to lend wider customer credit profile. The reasons someone may be declined using an automated process are not just because they have missed payments, have unsatisfied CCJ's, or defaults.

Reasons can also extend to first-time buyers who don't have a strong enough credit profile due to limited credit activity, and at the other end of the spectrum, there may be individuals who have substantial levels of debt, which they are servicing, but their debt-to-income may be scrutinized resulting in the borrowers looking indebted, with similar levels of debt to income.

The possibility of an impaired credit avalanche in the mortgage market must be considered with products offered to meet the needs of borrowers. While the threat remains, innovative approaches to lending offers pathways for borrowers to navigate these challenges and achieve their homeownership goals.

By embracing flexibility, manual underwriting, and a commitment to supporting borrowers, West One can mitigate the impacts of impaired credit and promote inclusive access to housing finance.